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Headlines March 1, 2001
- Japan: 2M lines in 2001
- Globespan shipping 16 ports on a DSL chip
- 2001: US 3M, rest of world 8-10M
- Qwest's DLEC going live in DC
- Will ending reciprocal comp bring up internet
prices?
- Editorial: Don't hurt yourself by hurting consumers
- How telcos can get more respect
"The ConnectSouth team represent the finest group of people I have
had the pleasure of working with over the past 15 years." Jeff
Mucci, CEO, ConnectSouth, who unfortunately just had to make most of them
redundant. The industry continues to explode (2M lines coming in Japan),
but many face tough times. Make sure you've dealt honorably with workers,
partners, and customers.
"Cisco was blowing up in February" VC Roger McNamee, pointing
to a great company also struggling.
A short issue, instead of the extra long one that would have included an
intense analysis of SBC's move of the basic DSL price from $40 to $50, along
with the projection of fewer customers. I am holding it till next Tuesday,
for additional facts from SBC. No revelations, but I see the move as having
substantial implications for earnings and the competitive situation. Email
dave@ to add your opinion to the data. Meanwhile, to prove I'm
not a telco-basher, I'll be wearing a Bell Atlantic T-shirt Friday at the
Phoenix conference, and I'll switch to a Pac Bell tee if they can
find one for me. Dave Burstein
Best of luck to our friends at Agere/Lucent Micro
on their IPO, and we're looking forward to news from the DSL Forum meeting
in Vancouver.
Japan: 2M lines in 2001
NTT East: We plan to add one million DSL subscribers.
Tetsuo Koga, General Manager of Sales for NTT East predicts one million
DSL subscribers in eastern Japan alone. Add NTT West, eAccess, Tokyo Metallic,
and KDDI, and the Telechoice projection becomes reasonable, although it
is much higher than last quarter's predictions. This remarkable
change, was inspired by a government initiative promoting the development
of the fast internet and the opening of competition. Centillium has a remarkable
lead in the Japanese market after investing years in the development of
the Annex C standard that minimizes interference from the Japanese ISDN
network.
Globespan shipping 16 ports on a DSL chip
Leading the way to denser DSLAMs
Telco office colocation space is some of the expensive real estate
in the world, and the DSLAM chassis has a certain fixed cost, so one key
design factor is to squeeze as many ports as possible into the box. So there's
a mad rush to squeeze as much as possible onto one chip, and therefore on
to one line card, so everyone welcomes the move to the new generation..
DSLAM designers have told us lately that
we are, for the moment limited primarily by other components (from
splitters to controllers) and power are more severe limits. Fortunately,
Tripath/Alcatel and several others are close to market with low density
line drivers. We need to hear more from Globespan about power, size, and
cost, but they did specify the 16 port is shipping and available now. db
2001: US 3M, rest of world 8-10M
Company estimates, however, were high for 2000
Company estimates put US subscribers in 2001 about 3M, with both
Verizon and SBC geared up to do 200-300,000 per quarter, BellSouth planning
400,000, and Qwest 250,000. Internationally, we report above Japan's planned
2M, Germany (DT) plans a million, and enough equipment has been ordered
by Telfonica to do a million subscribers between Spain and Brazil. France
Telecom, Telia, Telenor and KPN are deploying rapidly, with BT and Telecom
Italia making grand plans. Korea did 2M in 2000, which will be hard to match
in 2001, while Taiwan's equipment purchases suggest volume there as well.
Telcos in 2000 missed their goals by 20% and more,
so none of these numbers (or more detailed ones from analysts) are guaranteed.
But the growth remains impressive, and the shift away from the US dramatic.
db
Qwest's DLEC going live in DC
$3B revenue plan for 2003
Augie Cruccioti has his work cut out, if he's going to meet Joe Nacchio's
ambitious goals, but Qwest has met some tough targets in the past. They
outlined their plans last summer, to leverage existing OSS and customer
support to expand out of district. They are not interested in the residential
market, targeting instead businesses and telecommuters. California
and Texas were the first stage, and now they've come East. Qwest and MCI
have an excellent business case to purchase NorthPoint or another DLEC.
Will ending reciprocal comp bring up internet
prices?
Nearly done recip deal shifts costs to the
net
Nearly $2B per year goes from the four telcos to competitors, largely
as compensation for completing calls to Internet service providers. The
system was set up when the telcos thought they would be collecting, not
paying the fees, at prices so high the system is clearly irrational. Billy
Tauzin, who achieved the chairmanship of the House Commerce Committee with
the over $10M support of the telcos, has an active bill looking to end the
system. Consumer advocates claimed this would raise internet prices, a suggestion
we discounted a few months ago, feeling competition would keep internet
prices headed down. Telcos also said it would make no difference.
I apparently was wrong. Recip is a key cost factor,
but I believed competition would hold down the price. Recent DSL price moves
are evidence the expected repeal is making a larger difference than we expected.
Editorial: Don't hurt yourself by hurting consumers
Covad shut down thousands of consumers while trying to collect from
ISPs, and will pay a disproportionate price for that move. Every prospective
Covad customer will now have to ask "Will I lose my connection one
day through no fault of my own?" You can't measure the cost of that
doubt, (or a telco's loss of reputation because of inferior service), but
it is surely far greater than the money collected. We don't know whether
Covad and ISP was right in the legal case, but we are certain Covad made
the wrong decision. The customer is (almost always) right - good will has
enormous value.
How telcos can get more respect
Being more open with reporters brings the best
pr
A telco veteran and I have been trying to understand why so much
of the press coverage of Verizon and SBC is negative. Crucial, I believe,
is that telcos are so guarded with information that the only time a reporter
has any news is when they foul up so badly the story can't help getting
out. We know, for example, that SBC has one of the two or three most advanced
consumer VoDSL trials in the world. We also were convinced, off-the-record,
that Verizon is working darn hard to play by the rules of competition in
New York State. If the companies were more open, we'd have been able to
write those stories. Instead, they rarely discuss anything that hasn't
been approved at three levels or in a press release. Telcos have far more
power, and need careful watching, but anyone smart in this business knows
the telcos are no better and no worse than anyone else. Result of the too-careful
information policy: the company approved stories are rarely newsworthy,
and writing anything else requires investigative skills worthy of a cold
war Kremlin watcher.
Briefs:
- The JDS 3,000 person layoff proved that no one, not even the hottest
of optical companies, is immune from the industrywide problems.
Chips:
- Virata's new Helium 200/210 targets gateways and home voice systems
with double ARM cores and integrated ethernet. Their very helpful press
release included 23 statements from customers and analysts, including
Samsung's comment "Only Virata is able to provide us with the most
integrated and cost-effective technology available on the market, along
with excellent engineering service and support." Samsung itself
has an interesting chip in this space that is make inroads with a very
price.
- TI has a new network processor, with a MIPS core, which Terry Riley
told us is delivering excellent performance. We'll have an article in
a few weeks, "The smart part of the modem: competition for Virata
from TI, Motorola, ishoni, VoicePump and especially Samsung"
Stock Market:
- The Wall Street Journal pointed out that US bonds went up 21% in 2000,
and the NASDAQ down 39%.
- 98% less money is going into tech stock funds - $100M in January 2001
compared to $9.5B in January 2000, per Lipper in the Merc. But with
prices down, this may prove the wisest time to invest - recent buyers
of Efficient nearly doubled their money, and there have been opportunites
to do even better in many now low-priced DSL stocks. For VCs and private
investors, the opportunities are even bigger - some remarkably attractive
deals haven't found financing.
Headlines Feb 22, 2001
- Alcatel's
own Voice over DSL
- What
the heck is going on at Covad?
- NorthPoint
for sale
- Nortel
cutbacks - we got the story right by accident
- What
Wall Street knows about telecom equipment
- Covad:
making line-sharing work
- Copper
Mountain's cash gives them time
- TdSoft
$20M, Arrival $17M, MegaPath $10M
- ConnectSouth:
another one bites the dust
- New
Edge: we're cutting back
- Siemens
takes Efficient for $1.5B
- Briefs:
future demand, forecasts of bandwidth demand, Verizon, Motorola, Citynet's
fiber in the sewer, NHC,BellSouth, BroadJump, Alcatel/RC Networks, Virtual
Access, DVTel/Infineon, TI price dropping, LSI Logic, Tripath, Legerity,
Analog Devices, "There is no consumer choice for DSL in the UK",
KPNQwest, highspeed wireless. Maida Chicon, Harold Furchgott-Roth, Kelvin
Ko, Netopia/Proxim, Lucent, rapidly falling DSL chip prices
"It just keeps getting uglier and uglier,"
Ken Hoexter of Merrill Lynch on Covad's problems (WSJ)
Sorry for the delay between issues. We've been working hard, including
over 40 interviews trying to understand why SBC, a very smart company,
chose to raise DSL prices 25%+ when chip and equipment costs are plummeting.
Tuesday issues for SBC and also Centillium's look at Japan's 2M lines
in 2001. Meanwhile GTE's fast DSL connection on Kauai, 100 yards from
the beach of your dreams, brought us the news Wiley will publish
DSL, A Wiley Tech brief by Jennie Bourne and Dave Burstein in
September. But see us sooner - come to the VoDSL conference
in New York (ad below). I'm chairing it and will keep it lively. db
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Alcatel's own Voice over DSL
Gateway on a 7300 DSLAM
card
With a little help from friend TDSoft, Alcatel later this year
will deliver a voice over DSL gateway. according to an presentation at
a European conference. First targeted at Europe, the goal is to deliver
distributed VoDSL right in the telco CO, feeding a local switch. (In the
US, Alcatel will continue to work with CopperCom for now, and is in advanced
trials at telcos.) Alcatel last year was considering buying a gateway
vendor (CopperCom or Jetstream) but the price was too high, so they chose
to develop their own product.
The 7300 is a watershed for the industry, a true "next-generation
DSLAM" now becoming the standard unit in the major telcos, where
Alcatel has two thirds of the world market. A video grade unit with gigabits
of backplane speed, processors and control systems capable of IP quality
of service and multicasting, optional test capabilities, and interfaces
soon to reach OC-12 and beyond.
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What the heck is going on at
Covad?
"We are in no
danger of Chapter 11 at all" Covad's Sessums
Chuck McMinn and team built an exciting company, but this second
financial crisis implies a tough road ahead. Covad's writing off at least
another $50M - and probably much more - when they finish closing their
books this quarter. Part of the writeoff is an accounting rule (if a modem
is provided as part of a three year contract, the modem income has to
be spread over three years.) Another part is Marketing funds advanced
to ISPs that have not paid off, and a large part is additional ISP debt,
most of which we thought had been dealt with months ago. They are closing
300 of 1900 COs, extending layoffs, and returning trucks to the lessor.
They are essentially writing off much of the Bluestar deal. A few
days earlier, Covad played hardball with ISPs, shutting off thousand of
customers of Internet Express and DSL Networks, creating permanent fear
among customers, terrible pr, and convincing us, before the financial
announcement, that the problems were much worse than reported. If Bob
Knowling hadn't pushed through the last $500M financing just before he
left, the situation would be dire; with the cash on hand, Covad has many
months to turn things around, and we hope they do. Fortunately, AT&T,
XO, SBC, and others able to pay their bills are bringing in most of the
new customers, and Covad reached a businesslike settlement with Flashcom
in court. Below, some Covad good news (linesharing is working, and customer
self-installs are increasing), and next issues we have an interview with
ex-CEO Bob Knowling. (Sorry, no revelations - he continues to like and
respect the people he worked with at Covad.)
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NorthPoint for sale
Bids coming in for
late March
Verizon suit advancing
There are many rumors - but little solid information - about the
bidders for NorthPoint, in a process leading up to a court date in late
March, the hoped for (but not guaranteed) final resolution. One probably
out of the running is NTT/Verio, which is pulling away from DSL. (Will
NTT have to take a write-off on their $5.5B purchase of Verio, now clearly
worth less than half that?)
Meanwhile, they've won a ruling their $B plus
law suit against Verizon can proceed in California, and recent events
have only improved their case. NorthPoint should win the suit if the "material
adverse events" were caused by "facts, events, changes or effects
that are generally applicable to (A) the data industry, (B) the United
States economy or (C) the United States securities markets generally or
the Nasdaq Technology Index in particular". Clearly, problems in
the data industry played a major role. Lucent, Cisco, and Nortel have
also suffered shortfalls that NorthPoint's lawyers will attribute to "problems
in the data industry" - an argument whose merits may well remain
unclear until years from now in a jury trial. Meanwhile, we're watching
Verizon's financial statements. They presumably will have a lawyer's opinion
that minimizes their material risk, but the lawyers we've consulted are
not sure at all, and a reserve (or a settlement) would be prudent.
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Nortel cutbacks - we got the
story right by accident
"CLEC strategy"
failed, as Nortel's layoffs demonstrate
We were just referring to DSLAM future sales, but several misread
our comment suggesting deeper Nortel trouble, which we were not predicting.
We have enough trouble tracking DSL. Turns out, the same reasoning applied
to the larger company as well, but we hadn't predicted it.
John Roth of Nortel is a smart and honest man, who
has earned the industry's respect. We believed him when he told
five hundred wall streeters that Nortel would have an exceptional 2001,
growing 30%. Last Thursday, he had to accept that he was wrong, and laid
off 10,000 employees. The fall speech itself contained enough to anticipate
the problems, as we now see in hindsight. He emphasized sales to CLECs,
but told us Nortel would no longer finance them. Since CLECs worldwide
are short of capital, he was being unrealistic expecting major growth.
Apparently also unrealistic were his growth goals for optical networking,
the one area the bubble hadn't burst in. Nortel is the last of the telecom
giants to accept the problems, which originate in the capital expense
cutbacks at telcos around the world.
Corporate problems, unfortunately, overshadow
the remarkable fourth quarter of 2000, and Nortel has now shipped over
600,000 lines of the Promatory DSLAM. Korea Telecom has become a major
customer, and they are also shipping to @Link, First Mark, and PLDT in
the Philipines. Tokyo Metallic gives them an enormous upside in Japan.
Brett Sheppard believes they had 10% of the world market last quarter,
and will hold or increase that percentage this year.
What Wall Street knows about
telecom equipment
For the last six months, Wall Street has seen projections from
telco after telco that capital spending will be relatively flat or down
for 2001 and 2002. Qwest, Verizon, SBC (and of course all the competitors)
geared up for data and wireless, and are unwilling to up the rate of investment.
The result, of course, is equipment sales, especially in the US, also
cannot rise rapidly. While individual companies may buck the trend, it
was impossible for most major companies to increase sales 20-30%, as many
hoped. One by one, sales projections have come down, from Lucent, Cisco,
ADC, and now Nortel. Most were inevitable - you can't sell what they won't
buy.
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Covad: making line-sharing work
In nearly 100% of 1600
surviving offices
Linesharing cuts monthly line costs from $10-20 to about $3, and
is absolutely essential if there is ever to be any competition for consumer
DSL. The FCC ordered it for last June, and after delays it is working
well in much of the country, with lines delivered to competitors in less
than 5 days in many cases. Because it uses existing lines the problem
rate is as much as 70% lower, dramatically driving down the operational
cost.
Covad hoped to be this far along in December, but some
areas dragged to February. As they train ISPs and restructure agreements,
they are also moving to standard customer install for nearly all consumer
sales this spring. These kinds of day-to-day improvements mean the industry's
longterm future is bright - despite the painful stories we have to report.
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Copper Mountain's cash gives
them time
Revenues shrink dramatically,
and future unpredictable
When times got bad for the industry, a common comment was "The
good companies will do fine." This was clearly mistaken. Copper Mountain
has delivered some of the most reliable DSLAMs in the world, and given
customers (and reporters) excellent support. They've been fiscally prudent,
and earned a profit. Their partner program was so successful, the
rest of the industry copied it.
3Com just sold several million dollars worth of Copper Mountain
DSLAMs in an OEM deal, and mPower expanded their purchasing. But the problems
of customers like Rhythms, NorthPoint, and JATO cost them much of the
quarter's revenue, which McLeod and basement DSLAM orders couldn't compensate
for. NorthPoint was acknowledged as the source of the $8M write-off, and
inventory/work-in-progress in the tens of millions must be written off.
They now need to build international sales, where the market is growing
twice as fast as in the US. Paradyne, facing similar problems, has already
cut back staff and spending, and is emphasizing international sales -
Copper Mountain's conservative financing will give them breathing room
to do likewise, and bring a nextgen unit to market.
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TdSoft $20M, Arrival $17M, MegaPath
$10M
There's still money
out there
TdSoft is the early leader in delivering European 5.2 VoDSL, with
enormous potential and a deal with Alcatel. Because Alcatel ships more
than half the DSLAMs in the world, that deal is transforming the VoDSL
market. Founder and CTO Eytan Radian now is building the company in the
US - he's one of the most colorful characters in the industry.
Arrival is building a network in California, emphasizing business connections
in the areas not well served by Pac Bell. Many feel the industry survivors
will be led by companies like Arrival, @Link, New Edge, and IP Communications,
if they emerge as the strongest active competitors to the telcos in selected
COs.
MegaPath is a business-oriented ISP, where Harry Taxin has emphasized
high-quality service from the first, and MegaPath ratings on DSL Reports
have always been high.
ConnectSouth: another one bites
the dust
Staff gone, operations
expected to close
"Another one bites the dust" is our headline, to make
the point that industry problems are overwhelming many companies with
decent management and hard-working staff. We know the pain of the people
whose dreams were denied is very real; some will lose their homes and
health insurance. Good companies , not just weak ones, fail in this market,
and everyone looks for a scapegoat. But Bob Knowling of Covad, for example,
was not a brilliant manager in April and a rube in October. Rather, he
was a smart man brought down by industry changes. He's happy to talk,
with hindsight, about mistakes he made - but we've yet to meet anyone
perfect.
Morgan Stanley funded CLECs in different regions, hoping to duplicate
the remarkable early success of Rhythms, Covad, NorthPoint and DSL.net.
eAccess in Japan is now growing rapidly, and we hope proves a prudent
investment. But nearly a half dozen groups had a similar idea in the US
south and southwest, and the result is that all are in trouble. Before
the general CLEC collapse, Bluestar's IPO failed and their VCs were temporarily
bailed out by Covad (another portfolio company.) Vectris and Darwin followed,
and now ConnectSouth, when the next round of funding fell through.
New Edge: we're cutting back
55 jobs lost
Dan Moffat's company is pegged as one of the survivors, but that
means he has to make tough decisions along the way. With no more capital
in sight, he had to drop 55 more workers (second layoff) as well as temporarily
shut down some locations in Florida and Georgia, reducing COs to 500.
He's also had to turn down very attractive offers to take over others,
including Vitts and ConnectSouth; a very smart banker should find a way
to provide him the funding to take advantage of opportunities like that.
In the works is an editorial "Seven realistic
steps to increase competition, bring down prices and move toward universal
service" One of them will be to bring the price of fiber backbone
connections down in rural areas, the main reason Covad, New Edge, and
others are shutting down small offices. The marginal cost of a fiber-optic
lambda is dramatically less than the fees charged; if there is no competition,
then creative unbundling or regulation should be used to reduce monopoly-like
prices. Congressmen Tauzin, can you deliver that to your small town constituents?
Siemens takes Efficient for
$1.5B
Also investing 100M
for new DSLAM plant
Mark Floyd gave us the good news "We plan no layoffs, and
I as President of Siemens ICN Access solutions expect to continue to lead
and grow the company. " Besides a major SBC contract, he's expanding
in China and Barzil, where Siemens international experience will help.
Floyd added "Urban China is apartment buildings, allowing rapid growth
as we've seen in Korea. Telefonica in Brazil l looks to become a major
customer." With Deutsche Telecom aiming at millions of DSL lines,
Siemens is preparing to serve - and grow worldwide. Efficient is the leader
in modems, and their Flowpoint division was critical in early tests of
voice over DSL. The bid is 70% above recent trading, but only a small
fraction of last year's value.
Briefs:
- Where
will the future demand come from? The mantra remains "we
have more orders than we can handle", and the installation delays
would seem to confirm that. SBC, Verizon and most CLECs still take over
a month for most installs, compared to a telco (and cable industry)
standard of 3 days, suggesting a backlog. But we believe that overall
installation capacity has caught up with demand, with SBC, as we will
report next issue, with the capacity to handle 500,000 more orders than
they desire in 2001. Similarly, looking closely at order backlogs at
CLECs Covad and Rhythms, install backlogs are stable to down. The easy
early adapters have been reached in the major cities; we're now in the
"post-DSLAM" era, needing DLCs and loop extension to expand
the market, and service quality that will inspire customers to want
DSL.
- Andrew
Odlyzko of AT&T has convinced us we were wrong in our forecasts
of bandwidth demand, a key determinant of the equipment you need
to purchase today. He's found substantial data that suggest the widely
quoted "doubling every 120 days" growth of the internet is
overstated by half or more. That's what we've been hearing reflected
in network demand within DSL as well. Even doubling over a year will
make typical DSLAMs installed in 2000 obsolete in 4-5 years, but that's
better than the 2-3 years we have been projecting. Odlyzko is speaking
at the IGI conference Fiber Bandwidth Glut: Fact or Fiction April 18-19,
2001 in Boston
- 540,000
DSL customers was the first highlight of Verizon quarterly financials,
30% below their spring goal but ahead of the 500K they expected in the
fall.
- Motorola
is splitting its broadband division (the old General Instrument) into
two parts, entertainment and networking. Their Streamaster set top is
already in use in the Enron/Verizon trials, and they intend to offer
DSL versions of the gateways and intelligent home controllers they are
selling to cable
- Fiber
in the sewer, anyone? Citynet's robots are now at work in Albuquerque,
deploying cable.
Deals:
- NHC
won a large order for equipment from BellSouth. Like most
telco deals, this was a long time in the works, but the potential volume
is significant. With 5 North American telcos representing about 80%
of the market for DSL equipment, each decision is crucial.
- BroadJump
signed SBC, and is close to dominating the market for broadband installation
software, with several cable providers on board as well.
- Alcatel
will OEM basement DSLAM equipment from RC Networks, which has
produced equipment that works well in the field and is priced far below
the market. They have $3,000 units that make ideal building starters,
while the more exciting products, just coming to market, include voice.
- Virtual
Access has won orders from BT and BellSouth for routers, and is
optimistic in other telcos. A simple to use test mode, with a graphical
user interface, helps end-users and providers determine where the problem
is - local machine, local connection, DSLAM, etc. Pete Castleton of
Verizon told us last month that the ability to test is proving critical
to network reliability, and is a key factor in their equipment decisions.
Products:
- DVTel
announced a new Video over DSL system, using chips from Infineon.
Chips:
- TI
has been especially aggressive in pricing, competitors claim, but while
DSL is strategic to them, the dollar volume is probably not material
to their earnings. DSLAM manufacturers (except Alcatel and Siemens)
have all dropped their forecasts for 2001 - that's lower growth, not
an absolute downturn.
- LSI
Logic introduced an 8 port analog front end chip, with good numbers
for noise and power.
- Tripath
cut a deal for Alcatel's support of their low-powered line driver, one
of the first of a new generation that will raise DSLAM port density.
- Legerity
(the AMD spinoff) "opened the kimono" at ISSSC with technical
details on their high voltage chips that eliminate splitters and combine
voice and data.
- Analog
Devices, on the other hand, is working to eliminate the line driver
entirely, combining it with the analog front end.
International
- "There
is no consumer choice for DSL in the UK", Kingston said as they
deferred their service till at least next year, blaming BT.
All the CLECs are looking at business. CLEC Thus, even with the backing
of Scottish Power, has had to abandon DSL plans.
- KPNQwest's
Jerry Yohananov emailed that DSL "is not a big part of our future
strategy". They've cut back from 1600 to 300 planned COs.
Competition:
- Half
the companies at Cannes 3GSM conference will be out of business in a
year, predicted VC Olav Ostin. Highspeed wireless handsets and
customers will be very rare until much later than predicted.
People:
- Maida
Chicon now directs Verizon's multicultural marketing organization,
the kind of outreach lesser firms will need to develop as the surge
of "early enthusiasm" passes.
- Harold
Furchgott-Roth, the FCC commissioner without a television set, has
resigned, because "every free-market advocate in government must
fulfill his dream of returning to the private sector." Bush now
gets to name his replacement, as well as Bill Kennard's.
- Kelvin
Ko is the new Asia director for Videotele.com, the Tektronix video
server spinoff, which has promised dramatic breakthrus in price/performance
for video headends. DSL is barely visible in China, but Videotele's
three offices presumably are calling on many prospects. Video growth
is slower than expected, because the big telcos are scared of the investment
required, after massive losses six years ago. But as costs keep coming
down, (and DSL Internet traffic pays much of the infrastructure cost),
the economic argument keeps getting better. We think the time is now,
although many disagree; we are certain the economics will become overwhelming
within a few years, which means every DSLAM or DLC purchased today without
sufficient growth capability will prove a mistake over time. There's
less than a 7% difference in cost between video-capable DSLAMs and obsolete
ones; in the case of the Alcatel 7300, the new model is cheaper, per
port, than the old one, but has 10 times the potential capacity.
Stock Market:
- Netopia's
takeover by Proxim illustrated the downside of having cash -
cash makes you very attractive to a buyer offering stock. But "fully
funded until breakeven" is the mantra of today's successful net
company. That's one reason Wall Street is abandoning Amazon; their cash
runs out late this year, with no profit in sight.
- Lucent's
downgrade to near junk bond status is a frightening reminder of how
fragile the Internet and telecom boom really was. The DSL division continues
to do well, with growth expected in 2001. The SEC investigation is surprising,
but is another warning audited statements are not always accurate, especially
as things change. Management hoped that DSL, like optical, would be
spared layoffs, but the corporate problems are now so severe nothing
can be guaranteed.
- Several
analysts asked us about the impact of rapidly falling DSL chip prices
on stock prices, which we are reluctant to forecast. Virata seems the
least effected, as they emphasize features beyond the standard, but
no one else is likely to be immune from an earnings hit, especially
in Q2. (Since many chips are sold under contract, spot prices don't
always have an immediate effect.) But ADI, Aware, and others have already
seen severe stock drops, so don't read this as a sell recommendation,
please. (In fact, since we wrote this several DSL chip companies have
seen their stock rise.)
In the works:
- Japan:
2M lines in 2001
- Sprint's
2000 COs could make them the largest DLEC; Lucent Stingers in 1200 offices,
but only 60,000 customers before 2002
- Telcordia's
software delays and Project Pronto
- Elastic
Networks - a different technology, a longer reach
- Catena
- price breakthrough to add DSL to older DLCs
- CWA's
remarkable challenge to telco data accuracy
- CISPA
attacks SBC on content control
- What's
up with Project Pronto and software delays
- Broadband
Bill of Rights and a genuine consumer movement
- VoDSL
articles from AFC, Aware, and Copper Mountain.
Headlines Jan 17, 2001
- NorthPoint will emerge - with new owners
- DSL Yearend US ~ 2.4M, Korea 2M
- Rhythms cuts 450+
- $300M U.S. Government DSL contract
- Winfire - Systems good enough to sell
- Actelis: too fast to be true?
- Briefs: Nortel, T1E1.4, Qwest, 2Wire,Netopia, General
Bandwidth, Broadcom, Japan fiber, Mark Emery, Doug Broad, Jef Raskin,
Genuity
"Sony will become a personal broadband network company
by developing gateways. The era of stand-alone TV products is over"
Noboyuki Idei, Sony Chairman and the inspiration for Japan's
new telecom rules.
Liz Fetter promises a "structured sale" of NorthPoint, bringing
new owners and possible disappearance into a larger company. They ran out
of money because the market turned against them, and they chose a faithless
partner, Verizon. NorthPoint built a network that covers nearly half the
US in two years, delivering to 100,000 customers DSL, a technology that
was still in the labs when the company began. Customers will be well treated,
with service continuing without disruption.
What's next for NorthPoint
Buying time, not going out of business
"The purpose of our filing is to use the breathing
room Chapter 11 provides to sign an agreement with a financially sound
strategic partner who is interested in our world-class network, our skilled
and dedicated employees and our attractive customer base." (Fetter)
Last week, Goldman Sachs denied NorthPoint access to $160M of credit, which
required meeting certain financial targets. NorthPoint, like all CLECs,
will need cash for at least two more years, as they build a customer base.
The best investment bankers in the country thought the plans prudent, and
nearly every Wall Street analyst called them a buy last year when the stock
was worth $Billions. But the market turned away, and so did the bankers
and financing. They sold control of the company to Verizon for $1.3B, including
enough cash to carry them to profitabilility, but Verizon backed out of
the deal. Now, $38M in debtor in possession financing will let them meet
the next few months' payrolls.
Bidders will help them emerge
If Verizon valued the company at $2.6B five months
ago, what is it worth now? NorthPoint has 1700 COs across the United States,
with a complete operations team and system, as well as 100,000 customers
and strategic relations with Microsoft and other ISPs. Qwest plans to build
a $3B CLEC, and Nacchio told us they have been looking closely at all three
DLECs, just waiting for the right price. MCI also needs facilities across
the nation, and almost bought Rhythms last spring. NTT invested $5B for
Verio, and a fraction of that would give them a national DLEC to serve those
customers, while DT, FT, and Telefonica all are expanding in the US. AT&T
presumably won't make a move till it resolves with AOL whether they will
share a cable monopoly, but if they don't, AT&T needs the facilities.
Sprint has installed as many as 800 DSLAMs already on their own, so probably
isn't looking to buy. Verizon, if they don't quickly win the court case,
may have the most incentive of all. Surprises could be CLECs like Allegiance
or Focal (who share investors), XO, or a dozen others, if the price is right.
$400M of bonds pushed sale to bankruptcy
court
Yesterday an investor who bought NorthPoint's stock
(total, less than $200M) would also be responsible for $400M of 12 7/8 percent
Senior Notes sold February in a private placement. Now, a buyer in the bankruptcy
court auction could potentially avoid paying several hundred million dollars
by partially paying off the bonds. A similar debt load is why MCI did not
buy Rhythms last spring.
Likely losers
- Stockholders, and employees with options, will get
little or nothing unless the bondholders and other debtors are paid
in full.
- Goldman Sachs Credit Partners, CIT/NewCourt, CIBC,
Credit Suisse and a syndicate have apparently provided $140M of financing,
payment of which depends on the offers in bankruptcy court.
- Copper Mountain has reserved $8M and Netopia $1M in
case they are not paid by NorthPoint. All ordinary creditors, including
the landlord, are not guaranteed payment.
Mike Malaga had a vision
Mike Malaga, Pete Castleton, and Jeff Waldhuter inspired
this newsletter, convincing us that the fast internet would change everything,
and that they could deliver it over ordinary copper wires. (Some articles
we've written may have left them with regrets.) He worked tirelessly, once
offering to get up at 4:30 a.m. to be on our radio show. For years, progress
was slow, because neither the equipment nor the financing was ready. By
1999, the race was on, the IPO money poured in, and by that fall the network
build was ahead of schedule. There was a decency about how employees and
customers were treated; even folks laid off wished the company well. When
the hard times hit, Liz and crew were open and honorable. Nearly all the
customers of failing ISPs have been supported without problems, while others
continues to struggle.
Verizon still faces $1B lawsuit
Verizon signed a contract in August to buy 55% of
NorthPoint for $1.3B, but only paid $200M before it declared NorthPoint
in default. Verizon's backing out clearly cost NorthPoint the better part
of $1B, which suggests the possible damages if NorthPoint wins. We've analyzed
the contract at length, and spoken with the lawyers on both sides. Neither
we nor the attorneys we've asked to review it are willing to pick a winner.
Verizon has not set aside any reserves, but the potential damages are so
great that if they don't get a quick ruling, they have powerful incentive
to settle. The lawsuit is one of the key assets of the company going forward,
and will be aggressively mounted.
The leaders still did well
Mike Malaga may not have made hundreds of millions,
but he sold nearly $5M of stock in August and $3M in February. Liz Fetter
cashed over $M, Mory Ejabat nearly $2M, and Steve Gorosh $3M. Reed Hundt
also sold NorthPoint shares worth $600K, or more than he made in several
years as Commissioner of the FCC. Others in the industry cashed even more
this year: Rhythms' Hapka $20M, Redbacks' Barsema $140M, Globespan's Geday
almost $10M, Efficient's Floyd $33M, Covad's Knowling $20M.
DSL Yearend US 2.4M, Korea 2M
Numbers coming in
SBC in particular has not released a firm number,
and several have just given guidance. So expect a few revisions in the next
two weeks, but this number is close enough to be useful.
SBC - 880K?
Verizon 540K
Covad 274K
Qwest 250K +
BellSouth 200K +
NorthPoint 100K +
Rhythms 67K
Broadwing 40K ?
Others including NAS, DSL.net, New Edge (6K), Vitts, New South, IP, @Link
less than 50K,
Korea Telecom has the most subscribers in the world, over a million, and
Hanaro is the second or third largest, a remarkable achievement, according
to the Korean Ministry of Information and Communication. DT in Germany is
the leader in Europe, and we welcome anyone who can point us to more worldwide
numbers.
Winfire - Systems good enough to sell
Eric Geis, Firetap the first customer,
as "FreeDSL" passes 40K subs
Chad and Ryan Steelberg built a network and OSS designed
to support video grade service, and are now serving 40,000 "FreeDSL"
subscribers, the majority of whom pay $19 or more per month for a higher
tier of service. They've always intended to make money with variable speed
offerings and added value services, including video, and a hard-working
team designed a sophisticated network control system. They can shape traffic
to each client, allowing higher speeds, for example, when an advertiser
is paying to stream a video commercial. Chad tells us the result is a system
whose design is robust enough to resell. So they've established Octive as
a separate division. Eric Geis' Firetap, controlled by Homestore/Realtor.com,
and with close relations with the National Association of Realtors, is the
first customer. Geis was a VP and one of the first at Rhythms, so his endorsement
is a strong one.
Everyone's skeptical about Winfire, especially as other
DSL providers are struggling for cash flow. Steelberg's attorneys,
Rus, Miliband & Smith, have sued them, per the Orange County Register.
But they're delivering lines by the thousand, and we've heard nothing that
suggests the network they are building will not live up to their ambitious
specifications. Financial details are mostly confidential, with speculation,
but they have to be admired for accomplishments.
Rhythms - 450+ laid off
Protecting the cash as subscribers
pass 67,000
They raised $1B in 2000, giving them the cash to continue
through 2001 and well into 2002 after these cutbacks. 4,000 of the quarter's
20,000 new customers were line-shared, lowering costs, and a major expense
- market development funds to attract customers - has been eliminated. Yearend
2001 target is 175,000 lines, while capital expense in 2001 will drop to
$75M. They will cut to 40 markets, although details on how this will be
done are still to come.
Winfire gives Rhythms extraordinary
quality ratings
Chad Steelberg told us they are having remarkably
good results with the lines they are installing through Rhythms. To enable
the video and other profitable services, they constantly test line speeds,
and found the lines faster and more reliable than the telcos. In addition,
where speeds weren't holding up, Rhythms quickly upgraded to solve the problem.
We previously reported Rhythms designed to a higher level than others,
including a very low 4-1 oversubscription ratio for business lines. Winfire's
monitored lines confirm they are delivering as promised.
Actelis: too fast to be true?
"copper performance to fiber-quality
speed and reliability"
Actelis claims they "radically boost the speed,
range, and reliability of copper to achieve fiber performance and quality
in the local loop." That seems so unlikely that we have chosen not
to report about them previously. They have given neither concrete facts
nor performed demonstrations. We include them now only because some serious
people are signing on, including Marty Kaplan, chairman of JDS Uniphase
as a director; Paul Fagan of Fujitsu as VP sales; and Ben Hsu of Next Level
as VP operations. Gallagher's doing the pr (they played a critical early
role for Redback, Copper Mountain, Tollbridge, and Zhone) and investors
include New Enterprise Associates, U.S. Venture Partners, and Walden International.
Several companies (Voyan, Bandspeed, Paradyne) have publicly or privately
demonstrated increased performance/reach, and every chipmaker is working
on improvements in noise reduction, echo cancellation, and other signal
processing. But these efforts are targeting 20-30% better results, not the
order of magnitude suggested by Actelis.
$300M U.S. Government DSL contract
GSA deal covers the military as well
GSA Federal Technology Service Solutions in Oakland
led the contract negotiations, along with the Boston office, in a contract
Paula Shaki Trimble in Federal Computer Week believes could go as high as
$300M over five years. Agencies will be able to order through a portal,
from vendors to include: CAIS, Computer Support Associates, Comtech, Focal,
GAITS, Integrated Technologies, Net Connection, Netifice, Network Access
Solutions and Omega Consulting.
Incoming:
- Brett Sheppard of Nortel just sent an email
that we were wrong when we wrote "Nortel has no way to meet sales
goals through CLECs", and we questioned Nortel's (and Lucent's)
expectations for CLEC sales. He replied "You're off the
mark This week's announcement is part of an ongoing effort to focus
resources on high-growth businesses." He gave us some facts that
suggested how well Nortel was doing, including the IMAS/Promatory DSLAM
internationally. We'll have more next issue, when we know how much is
on the record. But we believe international CLECs will have to cut back
as well, and note that Versatel just decided to hold off on DSL in England
and France. The difficulty in depending on CLEC business was confirmed
by an industry CEO. "Let's face it, the CLECs have failed, and
we need ILEC business," he had emailed a few hours earlier. Neither
he nor we believe, of course, that all CLECs will fail - but we think
it will be very hard to build a Nortel-sized business by concentrating
on CLECs. We now expect less than explosive CLEC growth, but hope Nortel,
and others, prove us wrong.
- Thanks to Mark Peden, who was the first to point out we called the
T1E1.4 committee by the wrong last number.
- We agree with J., who wrote us T1E1.4 committee is the right place
to develop a standard to minimize repeater interference. But
we strongly disagree with J's conclusion the telcos should wait before
beginning testing of repeaters. Between 15% & 30% of the US is not
being served because of a distance problem; SBC is legally committed
to universal service, and that is good business for the other telcos
as well. Telcos have every reason to support research and begin testing,
the sooner the better. If the telcos - 90% + of the likely customers
- don't get involved now, the products may prove uneconomical to develop,
and too risky to invest in.
Briefs:
- Qwest signed a deal with NorthPoint and New Edge to charge
$4.89/month for shared lines.
- Folks at 2Wire, returning jubilant from winning awards at CES,
came back to discover more than two dozen colleagues laid off, presumably
because ISPs are taking their time about actually ordering gateways
from anyone. Brian Hinman says it was a very hard decision, but "Better
to do a layoff with plenty of cash in the bank than wait until you don't
have any." They have $20M on hand.
Products:
- Netopia TER/XL is an add-in security module designed to do
IPSEC and Triple DES at line speed for $399. They also introduced
- General Bandwidth announced the GenView Element Management
System, to control their VoDSL networks.
Chips:
- Broadcom announced the BCM5840, a single chip IPSEC security
processor that can run at 2.4 Gigabit per second. The price of
VPNs is due to come down.
International
- Japan will go to fiber, rather than DSL, according to Sony's
Idei. DSL Prime, despite our name, agrees fiber is the right decision
for an affluent nation, and believes the US telcos are making a mistake
not moving to it faster. But we have strong confirmation that several
hundred thousand lines of DSL equipment are on order in Japan, and suspect
that Japan will also grow rapidly in DSL, at least for several years.
People:
- Mark Emery, from Lucent AGS and Carrier Access, is now SVP
for R&D at CopperCom, and Steve Gaynor is VP for market development.
- Doug Broad moved from Lucent to Celox Networks, where they
are working on an switch designed to handle 6 million simultaneous connections.
- Jef Raskin's "The Humane Interface" went into a revised
3rd printing, and is now available in six languages. Since he left Telocity,
he reports having "more consulting requests than I can take"
and now a column in Forbes ASAP.
Stock Market:
- J.P. Morgan and Salomon Smith Barney were forced to postpone a $2B
Genuity offering, which received unattractive ratings. Backbone
providers have also not been kindly treated by the market - imagine
the Genuity price if PSI is used as a comparable.
Headlines Jan 15, 2000
- Standing ovations at Kennard's last
hurrah
- ADSL works fine at 24,000 feet - with
a repeater
- Share that DSLAM! The Judge says unbundle
- Sue the bankers!
- Casualties: Darwin, Nortel's CLEC strategy,
Bazillion, Motorola CopperGold
- Briefs: Verizon ISP pricing, Covad, Rhythms, Apple's
new DVD writer, Sharegate, 2Wire, Motorola, Copper Mountain, HarvardNet,
Alcatel, Avaya/Paradyne, Telocity, Nokia Norway, Rhythms Canada, France
Telecom, NorthPoint, Esat, Thailand, Michael Gulett, Richard Borbon,
Jack Reily, Phil Anshutz, Redback
“We must bring the benefits of the Digital Age to all
Americans, from the business districts to the barrios; from those with
every advantage to those with disabilities; from the young to the old;
from suburban enclaves to the rural heartland.” Bill
Kennard. Others talk about serving everyone - he worked hard to deliver
it, and will be badly missed.
NorthPoint faced a January 11 deadline for an absolutely essential loan.
Because they released no news, we fear the worst. Say it ain't so, Liz!
We also have confirmed several major DSLAM manufacturers have lowered
their production forecasts for the first half of 2001. In addition, with
chips in good supply, selected customers, especially in Asia, are being
offered much better deals. The industry is still growing rapidly, but
not at the extraordinary pace some expected. We will have more details
when we have on-the-record sources.
Two items from last week require correction. We did not mean to suggest
Efficient had lied to Wall Street, as might be inferred from the way we
wrote an article about five companies that disappointed investors. It
was bad editing and simply a mistake. We may also have had some facts
wrong about Verizon's pricing to ISPs, with a note in briefs below, but
we're waiting for details.
San Jose's SUPERNET this week look to be an interesting show, from the
SUPERCOMM people. We'll miss it, but will attand DSLCon Global in Hawaii
early in February, and visit San Francisco mid February as well. Say hello
to the round fellow with a beard and the irrepressible Jennie Bourne.
DSL works fine at 24,000 feet
Tracy Starnes using Symmetricom
repeaters at Chester Tel
Starnes, Assistant Plant Engineer, lives 24,000
feet away from the nearest connection, an AFC remote terminal, so he took
the opportunity to beta test the new unit. He's getting 3.9M downstream
and 492K up, in a binder with 100 pair and other DSL connections. One
happy user, of course, is not the same thing as a rigorous trial. We're
optimistic the technology will prove out, if not necessary this particular
unit, because Stanford Professor John Cioffi (who invented DMT coding)
and T1E1.3 stalwart Tom Starr both think ADSL repeaters can work. We are
amazed the telcos aren't jumping in to test the equipment; based on our
understanding of the bill of materials, this or 2Wire's similar unit would
be affordable in telco quantities. In many cases, it should avoid the
need for a DLC.
SBC & the FCC can't ignore the Telecommunications
Act
Judge Silberman insists on resale
of DSL
The court says the law is clear: DSL should be subject to the same
rules that require the telcos to share services. Unbundled elements and
resale of telco services are likely new tools for competitors as an Appeals
court orders incumbents to share all facilities - presumably including
DSLAMs - and offer their services at wholesale rates. Judge Silberman
found that separate subsidiaries were not sufficient to bypass the Act.
Rather, the subsidiaries were "successors or assignees" of the
telcos, and regulated.
Nothing's likely to change until after months or years
of appeals and proceedings. Under the law, the FCC can "forebear"
from requiring unbundling, but that would require a finding of public
interest, inherently implausible as a waiver would reduce competition
and presumably raise prices. Telcos will argue they will be inhibited
from investment in broadband if required to share, but that's unsustainable
on the facts. Telcos throughout the world are investing in DSL whether
or not they are given a protected monopoly, because they project DSL will
be profitable as an additional service offered by incumbent carriers.
It's a no-brainer for a telco to do 60-80% DSL coverage.
The FCC cut a deal with SBC to allow the Ameritech
merger to go through. The FCC got a commitment that SBC would provide
broadband to every customer in their territory - a universal service commitment
fulfilling public policy. SBC also promised to compete in thirty markets
across the US, and accepted several other goals. In return, the merger
went through and they got the monopoly they wanted on certain DSL services.
But Silberman called the deal "legal jujitsu", and vacated it.
Judge Silberman is a conservative Republican who appointed
Ken Starr and is unlikely to be over-ruled by the Supremes. His wife's
"Independent Woman's Forum" led the attack on Bill Clinton.
Arch-conservative Richard Mellon Scaife provided $450,000 to fund IWF,
described by the Boston Globe "In the marketplace of ideas, from
the national news media all the way down to local radio, the IWF has shown
its real strength... [The] IWF is well on its way to becoming the foremost
media nemesis of the feminist movement"
Sue the banker!
Log On America goes after Credit
Suisse for $100M
Companies are going broke because they counted on
the next round of funding being there, and the internet takedown has killed
that dream. Entrepreneurs are adults, responsible for their own decisions,
but it is incredibly seductive when the financial experts from Morgan
or Goldman look you in the face and assure you they will be able to raise
hundreds of millions for you. Company after company is failing today,
having expanded too much, and raised too little capital, usually relying
upon assurances from the best and brightest of Wall Street. Many will
be cheering LOA for striking back, even if their chances resemble Don
Quixote's. Rarely do bad judgements on Wall Street give rise to successful
suits, and "malpractice" standards do not apply. Fine print
in contracts protect the investment firm against even the most egregious
mistakes. Fine print doesn't always hold up in consumer cases, but businessmen
raising millions presumably are bound by every clause. LOA has additional
claims of Credit Suisse self-dealing (their subsidiary apparently took
most of the issue), and DSL Prime has not examined the case closely enough
to report on its merits.
But whatever the merits, many are cheering on
the "little guy" against the banks, who always make convenient
targets.
Tears and standing ovations for
Kennard
He cried as staff and reporters
cheered
Bill Kennard is the most extraordinary individual
we've met in telecommunications, with integrity that withstands severe
tests. At a Credit Suisse conference this spring, he followed Nacchio,
Whitacre, and a dozen other very smart CEOs and analytically outclassed
them all. They all looked at the effect of industry trends; he instead
looked at how underlying changes would create new trends. He'll stay in
Washington, in a special program sponsored by the Aspen Institute. His
immediate priority is "to get some rest and spend some time with
my 10-month-old baby who really needs a little bit more of my time."
Reed Hundt, his predecessor, found remarkable opportunities after leaving
office, and we hope the same will be offered to Bill Kennard.
Casualty List:
Darwin: $91M September wasn't enough
to keep them out of Chapter 11
Vulcan Ventures - Paul Allen - was one of the investors
that doubled up their bet on regional DSL provider Darwin, and Pat Mulloy
was promoted to CEO with a turnaround order. They cut more than half the
staff, shed healthcare and kiosk divisions, and focused on basement DSLAMs
and commercial customers. Cisco is owed $15M, and Tut $3M, per Bill Wolfe
of the Louisville Courier-Journal. Elastic Networks had been a major supplier,
but they were not referenced in the news article and UBS reports they
had cut their exposure.
Vendors "CLEC strategy"
is failing, as Nortel's layoffs demonstrate
Joe Roth, Nortel's CEO, replied "We're not
interested in customers who have trouble paying their bills" when
we asked him about troubled CLECs. But beneath the top management level,
his company's main strategy in telephony equipment has been to increase
sales among the CLECs, most of whom are struggling at best. Short of taking
more financing risks (they have $100's of millions at stake in companies
like Log on America and already faced major writeoffs at Prism/Comdisco),
Nortel has no way to meet sales goals through CLECs. Facing that reality
made this week's layoffs almost inevitable. Lucent is in a similar bind,
still aggressively courting CLEC sales with diminishing return and increased
risk, although Lucent's Stinger DSL unit is optimistic about avoiding
the worst.
Bazillion strands 5,000 in Seattle
Saturday, suddenly 5,000 folks found themselves
shut down, in some cases also losing phone service provided as part of
a bundle. Hicks, Muse did not deliver an expected financing round,
and with no money the company suddenly shut down, recommending folks contact
Speakeasy or Covad directly.
Motorola CopperGold Chipset
It was probably the most exciting of the early DSL
chipsets - if they could deliver what they promised. The brochures were
gorgeous, and the specifications excellent. Unfortunately, the final product
was so late they won very few customers, and now are discontinuing development.
Motorola has a separate group that is producing DSL soft modems - maybe
they believe the customer side won't need chips at all. They also cut
2,500 employees today.
Chapter 11 isn't the end
Smart lawyers know that if trouble is inevitable,
filing Chapter 11 as early as possible is usually the right move. But
companies fear the stigma, and go to great lengths to avoid it, typically
wasting the assets that would give them a chance to emerge. The court
and the law tend to strongly favor the debtor, in the hope of allowing
recovery. Debts are frozen, which means payables are deferred while receivables
roll in, giving a quick cash hit. Contracts can be abrogated, such as
colos, network backbone, or obligatory investments. Flashcom, for example,
looks to be winding up its affairs and liquidating; if it had moved earlier
to the 11 filing, with more cash in hand, it would have had six months
or a year to recover.
Jump.net absorbed into Allegiance
They were feisty, leading the price drops amongst
ISPs and being the first to rail against both telcos and CLECs who didn't
live up to service promises. But 15,000 customers are not enough to be
economical in today's climate, so they accepted an offer from national
mega-CLEC Allegiance.
Briefs:
- Pete Castleton of Verizon wrote that ISPs are
actually getting a better deal in the new pricing, and that our report,
and source, were inaccurate. The intent of the new pricing was definitely
an improvement in the ISP deal, he added, and the handful adversely
affected would be assisted. We're sure the facts he's giving us are
accurate, and we suspect the discrepancy is because we're comparing
today's margins against margins offered a year ago, before the merger
and some price changes. We suspect the problems we reported developed
later in the year, but we missed the changes before this article. Errors
help no one, which is why we sent the source article (from the respected
DSL Reports) to Verizon for comment before we wrote.
- Covad still has an ISP problem, with one-third
of lines classified non-revenue, despite the good news of good news
of 274,000 lines in service, (half business and half consumer.) Only
3 percent were sold direct, which explains Covad's latest 400 layoffs
and virtual dismantling of the $200M BlueStar acquisition. 17,000 line
shared lines proved that program is finally moving. But payment problems
now affect 92K lines and 19 ISPs, four of whom filed for bankruptcy.
Because of ongoing disputes with the ISPs, most have not joined the
"Safety Net" program. Until Covad comes to settlements
with the ISP, it's impossible to calculate the ultimate fiscal effect,
or whether even larger provisions will be needed.
- Rhythms in Massachusetts won the right to place
line cards in Verizon DLCs, split lines with others besides Verizon
(if the customer, for example, buys local service from AT&T), and
have lines conditioned without charge.
- Demand for bandwidth will probably be stimulated as
more users have the practical means to store videos. A step towards
that future came with Apple's new DVD writer, included in the
top line model and available for less expensive units. David Pogue reports
Compaq is the next customer for the Panasonic built DVD writer. More
backbone, anyone?
- Pleasanton, in the East Bay, is the home of Sharegate's
new California office.
- CES “Best of Show” for Home Data Networking went to
2Wire, showing their new 802.11b wireless gateway. 2Wire has inspired
the industry with the promised extra video and commerce features of
their box. Cayman has shipped more units, however, and folks like Sharegate
and Broadband Gateways are also close to market. Thompson, Sony, Panasonic,
and Motorola have products coming as well. The result is prices coming
down (including a large drop from 2Wire.)
- Some HarvardNet customers were left stranded
when Verizon cut off the lines before the date HarvardNet had reported
to customers.
- DSL.net is looking to rapidly build its customer
base, buying some from Exario (which is focusing on large VPNs instead)
and participating in Covad's SafetyNet.
Products:
- Copper Mountain dramatically extended the possibilities
of their DSLAMs with the 12 port CopperEdge T1 Line Card, designed to
enable service beyond SDSL limits. List price is $9,995.
- Motorola's StreamMaster 5000 set top box was
another hit in LasVegas. Enron/Blockbuster is using it for the Video
on Demand trials in New York and the West Coast. The trials are small,
but the partners (Verizon, SBC, Covad among them) have the potential
for a massive deployment after the kinks work out. Missing, however,
are most movies; Blockbuster hasn't been able yet to persuade Paramount
to join in widely, although they are both parts of Paramount. The music
folks are supporting Napster, now - Divx and other compression will
make movies easy to copy as well, and it's time for the studios to get
their heads out of the sand.
Deals
- Alcatel continues to win new business from Telus
& BellCanada, who have installed over 200,000 lines of DSL.
- DSL, contrary to previous assertions, needs security,
and not just a casual warning on the web page. SBC has made a deal to
distribute McAfee software, while Sprint is selling Norton. Telocity
instead uses the Nortel/Shasta central system to provide a firewall,
and charges users an extra $10 for bundle with security and home networking.
- Avaya told us they entered a new partnership
with Paradyne after a careful evaluation found the GranDSLAM particularly
easy to install and manage.
- Telocity first intrigued us because their plans
were to be much more than "yet another ISP", planning a home
connection with advanced video and networking features, plans deferred
as they built the ISP. They just announced a visionary move, working
with Inari on a home network over AC power lines. Sprint also sees home
networks as a crucial part of the service, delivering a HomePNA system
today and announcing a wireless one for the near future.
International
- Nokia won the DSLAM contract from Telenor of
Norway.
- Rhythms Canada has DSLAMs in 127 central offices,
with 1,300 subscribers in Toronto, Montreal, Ottawa and Hamilton.
- France Telecom's Wanadoo began an aggressive
new sales campaign.
- Bilsa began video over DSL trials in Ankara,
Turkey, with mPhase equipment.
- NorthPoint, short of cash, sold its half of
a Canadian joint venture to partner Call-Net for $5.3 (U.S.). Liz Fetter
was very clear about the cause of the sale. “Verizon dealt us a crippling
blow when it unexpectedly terminated our binding merger agreement six
weeks ago, which we believe was a breach of Verizon’s agreements with
NorthPoint." Our analysis of the suit last week was that no one
could be certain until the jury came back, but each step like this raises
Verizon risk of consequential damages. On the other hand, we have no
signs whatsoever that Verizon is seeking to settle, or that NorthPoint
can hold out long enough for the case to come to trial.
- Esat, Irish Independent, is testing DSL with
the hope of offering service starting in April. Incumbent Eircom is
one of the last of the EC companies to unbundle, and rates for competitors
are generally prohibitive,
- Lenso DataCom and United Broadband Technology are now
serving hundreds of customers in Thailand.
People:
- Michael Gulett, president and COO, has left
Virata. The announcement gave no details on his new position, nor did
it include the usual gracious statement from someone leaving "to
pursue other career opportunities".
- Richard Borbon, was the IDSL product manager
and helped launch NorthPoint IDSL in all LEC territories, seeing the
IDSL business grow from 3% of total lines to about 25%. Now he's the
Product Manager, Broadband for PCTEL. He's working on the host signal
processor-based (software) V.90/ADSL combo PCI card, and hopes the soft
modem allows bundled DSL to become standard equipment on new PCs.
- Jack Reily joined Efficient as EVP, corporate
development, and Clyde Musgrave As CTO as Bruce Brown builds his team.
- Phil Anshutz, controlling Qwest stockholder,
just bought most of the debt of Regal Cinemas, and looks to take control.
Qwest is the most logical buyer of a DLEC, because they intend to build
a $3B national CLEC and have the best use of the equipment and colos.
Joe Nacchio agreed with this conclusion, but replied "the price
can go even lower" when we asked if they would buy Rhythms, Covad,
or NorthPoint. He (and others) are presumably looking at such a cutrate
deal, paying off the bondholders in part and the stockholders minimally.
A deal like that (including a chapter 11 filing) is the most plausible
result if a big DLEC runs out of cash, but we cannot confirm NorthPoint
is about to announce such a deal, as rumored.
Stock Market:
- Solomon Smith Barney pointed to Rhythms and
Teligent as potential problems for the banks owed money.
- January 10 CIBC downgraded Redback, and
the same day Robbie Stephens raised their rating. We're glad not to
have make a call, because Redback's future depends on the success of
the new optical equipment, just starting to ship, and we have no idea
how to value a new product in a new market. The current subscriber management
units have been remarkably widely accepted, but subscriber management
is becoming a feature of other network equipment.
- UBS Warburg lowered estimates for Cisco, ADC, and Nortel
telecom sales, confirming our conclusion at top that DSLAM sales growth
has slowed, although we do not have information on the same companies.
In the works: "Deregulation is a colossal and dangerous failure"
Gov Gray Davis of California, as lights go out in Silicon Valley. Will
this prove true in telecom as it has in electricity? **
We welcome contributions to the article "100 words of advice to the
FCC". ** The next Voice over DSL News is well along (coming 1/27),
with an delightfully clear piece on channelized voice from Jim Sackman of
AFC at http://www.vodslnews.com/a/Sackmanchannelized.html.
From Judge Silberman:
251(c)(4), requires ILECs "to offer for resale at wholesale rates any
telecommunications service that the carrier provides at retail to subscribers."
Section 251(c) also requires ILECs to negotiate in good faith, to provide
inter- connection with other telecommunications carriers, to provide unbundled
access to network elements where technologically feasible, and to allow
physical collocation of equipment necessary. The Act defines "advanced
services," regardless of transmission medium or technology, "as
high-speed, switched, broadband telecommunications capability that enables
users to originate and receive high-quality voice, data, graphics, and video
telecommunications using any technology." DSL is clearly included.
It did not limit the regulation of telecommunications services to those
services that rely on the local loop. For that reason the Commission may
not permit an ILEC to avoid s 251(c) obligations as applied to advanced
services by setting up a wholly owned affiliate to offer those services.
Whether one concludes that the Commission has actually forborne or whether
its interpretation of "successor or assign" is unreasonable, the
conclusion is the same: The Com- mission's interpretation of the Act's structure
is unreasonable. * * * * The order of the Federal Communications Commission
is vacated.
AT&T emphasizes that the affiliate markets the same category of services
to the same body of potential customers as did SBC/Ameritech.
The Commission is thus using the successor and assign limitation as a form
of legal jujitsu to justify its relaxation of s 251(c)'s restrictions.
Complete text at http://laws.lp.findlaw.com/dc/991441a.html
Headlines Jan 5, 2000
- SBC's 200 COs in BellSouth and US West
- Soft modem at Vegas interoperability
demo
- Who makes money as products become
commodities?
- Investor Relations 101 - Don't lie
to Wall Street
- Verizon price increase to batter ISPs
- @Link's big Winstar deal
- Briefs: Earthlink, Broadcom, Alcatel and ADI chip leaders,
Agere/Lucent Microelectronics Linux, LSI Logic/Datapath, Billy Tauzin,
Mike Powell, Blair Levin, T. Curtis Holmes, Next Level Denver, Everest
Broadband 50M, SBC/Prodigy
"NorthPoint is on the brink of disaster in a life-or-death situation.''
Barry Sullivan, NorthPoint's attorney, reported by Bloomberg
NorthPoint decision time is at hand. Cash on hand will run
out within weeks. Between Friday and Wednesday NorthPoint will either
receive $160M from a temporarily blocked credit line with Goldman Sachs,
CIBC, CSFB and a consortium of lenders or face imminent Chap 11. NorthPoint
is supplying weekly cash numbers to the banks and paying $575,000 for
Ernest & Young and Shearman & Sterling to document to Goldman
that the terms of the line of credit have been met, and the funds must
be released. Copper Mountain this morning lowered income, because of fear
of NorthPoint non-payment. The Verizon lawsuit is still arguing jurisdiction,
and unlikely to help in time.
Meanwhile, NorthPoint is spending more money on T-3's
and other network expenses than they are receiving in revenue. They could
drop virtually the entire headquarters, eliminate interest payments and
still be cash-negative for the year. The business must get cash.
We hope they make it: honorable outfit, and the longterm fundamentals
remain attractive.
SBC's 200 COs in BellSouth and US West
What will they do with NAS COs?
NAS is worth a fraction of SBC's $150M investment,
so they just received 200 COs as a sweetener for converting into near
worthless stock. Most of these are in major business markets - NAS planned
500 COs in 2001 in cities including Atlanta, Miami, Memphis, Louisville,
New Orleans, Seattle, Phoenix, and Denver. Whitacre convincingly asserted
this Spring that SBC intended real nationwide deployment, not just
a minimal satisfaction of Ameritech merger requirements, but they've done
virtually nothing before now. NAS was promised SBC business in Verizon
territory, where they have 500 operational COs but fewer than 10,000 customers.
Officially, SBC can tell us nothing about plans for the spaces "all
we're saying now is that we are still determining how best to use them".
SBC general policy is to tell the press as little as possible for a public
company. The pr people are cordial, but we wonder about a corporate strategy
that amounts to making press coverage as difficult as possible.
Soft modem at Vegas interoperability
demo
DSL Forum proves everyone can work
together
70% of modems in new computers are primarily "soft
modems", using the system processor rather than a dedicated DSL chip.
That's clearly the future - 5 or 7 years from now, DSL modems will probably
be built in and minimal hardware. Motorola is bringing that closer, with
a sample unit that passed interoperability testing at the University of
New Hampshire and is included in the DSL Forum CES demonstration. Standards
this time are higher than at SUPERCOMM in June, with more extensive testing,
but the results are the same - the equipment works together, and the show
demo is truly impressive. Also big at the show will be home gateways (2Wire
is showing wireless and voice, Motorola the set top box used by Enron/Blockbuster
for VOD, and way more we'll report next week as the show announcements
come in.
Who makes money as products become
commodities?
Soft modems will reduce the DSL chip market substantially
in several years (PC Tel is also close), but we believe the key business
issue in 2001 will be competitive pressure dominates. A worldwide chip
shortage held back supply, but UMC now takes big ads in EET promising
fab capacity now. So margins will predictably erode as prices come down,
while every vendor who doesn't want to sell at rock-bottom prices needs
to differentiate. There are differences in reach in chips and modems,
which increases the number of customers served, and of course some vendors
give better support and prove more reliable. But everyone is struggling
up the food chain to gateways, voice, integrated functions, and the like,
as the prices of ordinary equipment are likely to plummet. Great for the
consumer and DSL provider, allowing an increase in volume. It's too early
to predict whether larger sales will make up for slimmer margins.
Investor Relations 101 - Don't lie
to Wall Street
Even the best of analysts (and journalists) are
highly dependent on management's projections, although we try to watch
customers, suppliers and the industry as well. Journalists rarely lose
their job for poor forecasts, but analysts do. Anything that makes them
doubt management's full disclosure scares them, and hurts the company
more than the bad news itself. Carrier Access shot themselves in the foot
even more dramatically, releasing bad news 8 p.m. Friday before the holiday.
One top analyst downgraded them heavily, assuming if they were burying
news, there was even more to hide. BellSouth and SBC took hits a few weeks
ago around their lowered projections because the explanations when implausible.
(Increasing DSL shouldn't cost BellSouth that much, while being behind
in Ameritech region construction is a typical ordinary problem, not a
special one-time item.) The result: much of the street is coming to believe,
as we do, that telco earning growth in the teens is unlikely, and management
will have more shortfalls to explain.
Verizon price increase to batter
ISPs
GTE outsold BellAtlantic because
of ISP ties
Verizon will impose an increase systemwide on ISP
charges, which will be especially acute in GTE territory. Two-thirds of
GTE's subscribers had come from outside ISPs, a key reason GTE had twice
as many DSL customers as the much larger Bell Atlantic, whose efforts
were 70% short in 1999 and 30-40% short in 2000. The new prices will be
as high as $35 for a service that Verizon sells itself, including ISP
charges, for $40, according to DSL Reports. Like Bell Atlantic's previous
pricing, it favors Verizon's data subsidiary and AOL, while effectively
putting out of business most of the competition. The margins provided
their data sub are twice that offered the average ISP - an effective way
to promise open access in DC but not deliver it. We are disappointed that
FCC leaders, well aware of the situation, have chosen to fight other battles.
@Link's big Winstar deal
Telco quality ATM backbone wins
big voice deal
"We're now fully funded through 2001" a happy Monish
Kundra reports, as Winstar's Bill Rouhana wrote us " VPN capabilities
will help us lower our costs in serving off-net customers and focus more
on driving on-net business. @Link is a well-funded new player with a management
team that understands the local communications marketplace. " Alex
Good, once senior at Bell Atlantic, leads that team. They've built heavily
in Ameritech, with ambitions beyond, but like so many have had to cut
back in the last few months. Winstar has recently raised the better part
of $B, as Credit Suisse doubled up its investment and Microsoft came along,
and looks to save money buying long term capacity, creating a virtual
IRU with attractive asset accounting.
Winstar did a through investigation of deliverable
VoDSL, and told us that reliability was critical to them. We've been wondering
since the spring "what ever happened to VoDSL", as none of the
big players have moved in; a vote of confidence from Winstar would have
been a strong endorsement. We hear rumors that the VoDSL equipment itself
is proving out well in the field, but the DLEC networks are not sufficiently
robust, but have not been able to confirm that.
Briefs:
- Kudos to Mike Lunsford of Earthlink, who gave
a straightforward and honest answer when the Contra Costa Times inquired
about local service problems. "It's a funky problem that we have
our hands around, and the problem is in its death throes," Lunsford
said. "We almost have it whipped. We will find a way to reimburse
all of the customers who have been affected. This is entirely on Earthlink's
shoulders." Customers prefer honesty, we believe, not the typical
deceit and fingerpointing typical of service problems. We've personally
recommended Earthlink, not least because our own service has gone done
once in six months - when a telco tech cut the line. Netopia, Earthlink,
and Covad have proven rock solid for us.
Competition:
- Broadcom Corp introduced for CES a single-chip
digital set-top box. Their purchase of E-14 will help them move from
cable to DSL, and many of their large cable box customers have been
eyeing the DSL market.
Chips:
- Year end DSL chip sales will show Alcatel with
a major lead, and ADI is probably second. Globespan is the largest
of the independents, and the most visible.
- Linux support in home gateways is the latest offering
from Agere/Lucent Microelectronics. Ucentric Systems of Massachusetts
is the first customer announced.
- LSI Logic/Datapath introduced a combined analog
front end/line driver that operates at 5 volts and has very low noise.
It's 14 bit linear and -160 dbm, excellent performance for the $12-14
price quoted. But we are very skeptical of LSI's claim this will increase
servable homes by 30%, because other sources of noise in most environments
are more significant. We'll wait for field results, although we predict
a 10-20% total increase in reach from multiple technologies.
People:
- Billy Tauzin took the Chair of the House Commerce
Committee, with particular close ties to BellSouth and other telcos.
The New York Times reported he "raised millions of dollars and
threw lavish parties at the Republican National Convention" to
get the job. The end of reciprocal compensation is step one, and bills
to eliminate FCC review of long distance are likely from the committee.
- Mike Powell received support from John McCain,
chair of the Senate committee that would confirm him if he chooses to
take the FCC chairmanship.
- Blair Levin, former FCC chief of staff, joined
Legg Mason, who have a strong telecom analysis group.
- T. Curtis Holmes from Lucent takes over as COO
of Metasolv.
Stock Market:
- Where and how will Motorola recognize its $6B loss
on Next Level stock , or SBC its several hundred million on its investment?
Presumably, buried on the balance sheet - but in Moto's case, that's
enormous in proportion to reported earnings.
- Next Level surprised with lower sales and a
writedown of inventory, but UBS Warburg reports Qwest is installing
VDSL in parts of Denver, and we've previously reported Qwest's Nacchio
comment that he expects to move heavily in VDSL when Motorola delivers
the next generation of equipment in mid-year.
- Everest Broadband, a New Jersey BLEC, raised
$50M from Philly utility Exelon, Pequot Capital and Softbank. They are
looking to buy competitors.
- SBC added three captive board members at Prodigy,
and provided a $100M line of credit. SBC now has a consumer deal with
Prodigy, separate business deals with NAS and Covad ($600M), and 200
of their own COs out of district.
Dec 29, 2000
What if NorthPoint beats Verizon?
Covad, NTT ready for Japanese breakthrus
British Telecom/Teradyne: testing adds customers
VersaPoint deal killed by NorthPoint's $ woes
"Covad will face a class action suit"
Old FCC blocks Verizon LD in Mass for competition
Casualty list - some fatal
-
JATO "We are terminating service in
all locations shortly
- Westell warns on sales
- ECI cutting 300 as IPOs flounder
- Picus: Nokia financed the equipment, but no
one paid for operations
- Digital Broadband drops 450 people
- Maverix.net, DSL.net, Merrill Lynch, Intel
Telocity/Hughes to become giant DSL ISP
Inadequate service costs Telia 3G wireless license
The AOL settlement - an editorial
-
Make history by opening
access to content
- Prevent discriminatory pricing locking
out competitors
Briefs: Rhythms, Verizon, longrun telco financial crunch,
consumer DSL needs volume, Ameritech slowdown, Covad's cheap business
service, Symmetricom testing, BellSouth & Sprint fiber going home,
Nebraska Central Telephone, Westell's modem is a mini-router, iMagicTV/Advanced
Fibre, Alcatel 7300, Jetstream/Pine Tree, Accelerated/Siemens/Winstar,
Paradyne/Sierra Telephone, MegaPath/Telocity, Iceland, Telecom Italia,
France Telecom, RCN cutting, AT&T $2B loss on @Home, Tioga, line
driver power coming down, Proxim/Virata HomeRF. Chartered Semiconductor,
Ron Cates, Mike Borsetti, Mark Housman, Dave Farber, ITXC, analyst's
clash on telco prospects, Ciena/Cyras and Redback's challenges, Hawley's
Gluon, VoDSL in New York, Netopia's cash trove
Subscribe your colleagues - just reply to this
email and say "sub xxx@zzz" or send a note to subs@.
It's free.
"Poof! Smart investment ideas go up in smoke, as
market tumbles. Uncontrollable, indefatigable, unreasonable, outlandish
exuberance" Wall Street Journal
Enjoy your holidays, and sorry for an issue that's
long even after we dropped the ads at the end. We've been on hold, confirming
the facts on Verizon/NorthPoint.
Verizon, late November, was facing a $400M loss if they
completed the NorthPoint deal - and a contract that did not give them
a clear way out. DSL Prime believes they gambled that a weakened NorthPoint
could not defeat them in court - or at least that the case would drag
on for years without affecting them directly. But if the jury believes
they wiggled improperly, the sky's the limit on damages. (Long article
at end).
DSL subs in the US will end 2000 at 2.2 or 2.3 million. Korea will be
way 1.5M, and the rest of the world is racing to catch up in 2001. That's
400% growth this year, and it will more than double in 2001. DSL remains
a great industry and great place to work, despite financial problems.
SBC's $20B market drop last week dwarves even a $B judgment. DSL delays
were a small part of the explanation. We could pretend to be prophets,
having four days earlier told a NY Times reporter about the underlying
pressure on telco finances, but that was just a coincidence. We've amplified
below our August analysis, that telephony is a slow growth business and
aspiring to double-digit returns cracks the system.
A correction: Rhythms deferred paying a dividend, it did not default.
Karen Breen's letter below.
Covad, NTT ready for Japanese
breakthrus
41% Covad owned ACCA key NTT partner
"Our Japanese customers are ordering like mad!" Laurie
Falconer of Centillium writes. (They have the first chips appoved for
Japan's "Annex C" standards, designed to minimize ISDN interference.)
Few homes are lit so far, but competition is getting fierce enough that
NTT just dropped prices 20% for DSL. They also been ordered to reduce
charges 20% for lines to competitors, and line share costs almost in half
to $3 or less. Sumitomo has a new DSLAM, Xpeed is selling modems to eAccess,
Siemens is delivering DSLAMs to Right Access in Tokyo, and Sony is leading
All Planning, a $300M webcaster. The fewer than 10,000 customers at the
beginning of 2001 will be hundreds of thousand by yearend - possibly more.
Prices are settling at Yen 5,000-7,000, about 20% more than the US, but
a great bargain compared to former ISDN rates. (10 million subscribe to
ISDN, whose rates are dropping dramatically.)
Tokyo Metallic and eAccess have ambitious plans to install DSLAMs, but
the volume leader undoubtedly will be telco NTT, which sells DSL to retail
customers through NTT Communications. NTT Communications will offer one
plan reselling NTT East and West DSL services, but in most major cities
will emphasize a slightly cheaper plan from ACCA, owned 41% by NTT and
41% by Covad, which is supplying operations support. Along with hundreds
of thousands of customers, that affiliation connects Covad with NTT, which
invested $5.5B to buy Verio to expand its US base. Affiliate NTT Docomo
is also a major AT&T investor.
Teradyne: testing adds
customers
13% more customers, 20% fewer problems
British Telecom has ordered $6M of Teradyne test equipment after
a large trial proved testing saves money. It also prevents angry customers,
saves reputations, and is essential for mass deployment. The best way
to solve the "DSL Hell" image problem is to reduce installation
difficulties, and testing the lines to prevent problems is a key step.
Teradyne's Celerity works from the CO, and is one of a new generation
of single-sided test units.
DSL Prime believes the US situation is no longer an inability to meet
demand, and the heavy telco advertising now being used to attract customers
confirms that. So there is now a business case to serve folks beyond 12K
feet, the arbitrary cutoff often used to minimize possible field problems.
Testing which lines will work cuts field costs dramatically, while increasing
the servable customer base 20-25% (lines testing green beyond expected
lengths, plus lines that would have been arbitrarily rejected below 18K)
db 12/20/00
VersaPoint deal killed
by NorthPoint's $ woes
What hope is there for Euro competitors?
For seven million euros, Versatel bought out NorthPoint's half-interest
in their joint venture that is actively lighting COs in Germany and Benelux.
The deal required NorthPoint to make a 25M euro further investment, and
apparently no one thought a share in one of the most advanced Euro CLECs
was worth investing in. Malaga and Borsetti spent months in Europe planning
the network , and the payment is pennies on the dollar for NorthPoint's
investment. A top industry consultant speculated this morning the European
CLECs are dead; we hope he's wrong.
"Covad will face a
class action suit"
Struggling ISPs fighting back
Covad has legal and moral obligations both to partner ISPs and
endusers, and the
"Safetynet" clearly hasn't resolved the problems. Consumers
with $49 dollar contracts were offered a switch only to more expensive
services tailored to business (DSL.net and InternetConnect among them)
instead of the more appropriate service Covad is selling through Fry's
at $39. Because Covad has not been able to resolve issues with ISPs, some
endusers looking to transfer are confronted with warnings that suggest
they may be liable for damages. Others, whose ISPs are attempting to re-organize
under Chapter 11, Covad is not trying to take. NorthPoint choose to protect
their endusers, purchasing accounts from ISPs in trouble and easing transfer;
Rhythms according to Barry Diamond of Internet Express, was also "totally
professional, and took care of the customers properly".
Diamond is working with other ISPs to former a stronger,
merged organization going forward, and meanwhile trying to deal with the
problems of his Covad-served customers. Like many ISPs, he's invested
heavily in acquiring and installing the customers, an asset that would
have been worth hundreds of dollars each not long ago. (Dial-up ISPs sell
for more than that).
Like Telocity (which plans to lose $400/customer in 2001), he absorbed
early losses and is in trouble because financing has dried up. He had
tried to negotiate with Covad to continue, but Covad's settlement, structured
to maintain an asset on Covad's books, were impractical for him. He also
blames Covad for part of the problem. "We absorbed exorbitant setup
fees, paid nearly three times normal cost for a connection and purchased
a great deal of specialized equipment." He sees the SafetyNet as
"an effort to get around Covad's agreement not to contact ISP clients
directly. " Covad is at now at odds with several of the ISPs, and
Barry is not alone in predicting suits against them.
Old FCC blocks Verizon
LD in Mass for competition
$6M fine for SBC - but will W's
FCC go along
"The Bush administration should bring kinder and gentler regulation
of the RBOCs", per Dan Reingold of CSFB, but until then 271 long
distance proceedings are the best way to pressure the telcos. Verizon's
million LD customers in New York alone provide about as much revenue as
all the DSL customers in the system, so holding up LD is the best lever
the government has. Kennard made clear Verizon will succeed next time,
if they open a little to the competition. "Verizon came close to
meeting this standard in Massachusetts. ... The company needs to address
the following issues that have been raised in this record:
·
Non-discriminatory provisioning of loops used by competitors to
provide advanced services;
·
Improved access to the systems and information necessary to order
loops used to provide advanced services; and,
·
Pricing of elements used by competitors, which reflects forward-looking
costs"
The key thing competitors didn't get is requirements for regularly measuring
Verizon performance and automatically enforcing the agreement. Provisions
like that from the Ameritech merger led to a fine of $6M for SBC. Mike
Powell, presumed next FCC Chairman, believes in less stringent government
regulation. But he also believes in creating competition, which in the
real world will require tight controls on the telcos. We expect him to
prove a surprise.
Casualty list - some fatal
JATO "We are terminating service
in all locations shortly"
They started as an alternative to US West, then attempted to go
national. Both efforts failed, and their alternate strategy, regional
service, wasn't sufficient. Painful to see them go - they some good people
on staff. We received a call this week looking for a purchaser of Copper
Mountain DSLAMs, new and like-new - guess we know from where now.
Westell warns on sales
The Chicago snow hurt, but the real problem is slow going at British
Telecom and (not announced) SBC. Westell should learn from Covad's new
policy, to give lower estimates and sometimes beat them, which has worked
very well for Microsoft as well. Their chip supplier Virata will take
a hit in sales as well. Anton Wahlman of UBS raised the interesting question,
will Fujitsu (who is OEMing Westell DSLAMs to British Telecom) back away
from the market. Their US customer, GTE, is shifting away, and they've
failed to win any other large contract.
ECI cutting 300 as IPOs flounder
With the IPO market virtually dead, ECI may gain little from the
plan to break into five companies, raise more cash, hold on to employees
with stock options and up the stock price. So they are resorting to layoffs
as well, per The Marker. An engineer-rich telecom manufacturer,
they supply DSLAMs in Germany and modems in France.
Picus: Nokia financed the equipment, but
no one paid for operations
A year ago, Picus had some of the most ambitious plans in the industry.
Today, unable to obtain financing, they filed for chapter 11. "Telephone
customers are urged to move to another carrier as soon as possible to
avoid the chance of lost service during this process. Cavalier Telephone
and Stickdog Communications have agreed to convert customers at no fee".
Last year, we reported on a company with a mission. "Peter Cousins
of Picus told DSL Prime about his company's goals. "We're proud to
be pioneers, because we know what new technology enables. We've already
opened Clarent gateways for VOIP in New York, Madrid, Milan, and Lugano,
Switzerland. We'll bundle multiple lines of local voice, 500 minutes of
long distance and 384/128K DSL for around $100. 27 COs in Hampton Roads
open in October, and we expect to be in 160 cities by 2001. Nokia isn't
just providing equipment, but also the expertise to install and manage
our growth. The deciding factor was field experience." CopperCom
provided the VoDSL gateways.
Digital Broadband drops 450 people
HarvardNet dropped DSL two weeks ago, and now competitor Digital
Broadband cut back 80% and filed a bankruptcy petition. Peter Howe in
the Globe reported they had only 650 DSL customers, although they serve
over 300 central offices. 2,000 HarvardNet customers and hundreds of COs
of equipment are up for grabs, including Harvardnet's New York facilities.
Financial losses are faced by venture capitalists, including Boston's
Thomas H. Lee and Boston University's endowment fund, and had drawn down
$70 million from a $100 million credit line from Cisco. Cisco issued a
warning on customer debt problems, but these and others may drive the
actual writedowns well above the reserves already taken.
Also-
Maverix.net, in the Midwest, immediately laid off 80% of their
employees and expected to be out of business shortly.
DSL.net expects 13,900 lines in service at yearend, doubling next
year. That's a modest goal, as they are adding customers from Covad's
transfer program are building a substantial Covad resale business and
actively looking to acquire customers from others. They have stopped their
network build, and are taking a writeoff to cover cutbacks. David Struwas
projects cash on hand will cover into the fourth quarter of next year.
Merrill Lynch will probably fire 8-10% of the research staff, per
the WSJ, while Bear Stearns and Prudential have already cut dozens, amid
a 40% drop in broker profits. Richard Strauss of Goldman Sachs told the
WSJ "Either the business has to get better, or investment banking
for telecommunications and the internet is an area that's ripe for reduction."
Early 2000 results were so strong bonuses should be good this year, but
new hires should be few, and cutbacks on the way. Wall Street is not a
gentle place - when profits go down, heads roll.
Intel's venture arm is losing money in Flashcom, Copper Mountain,
ITeX, and Covad. Boston University's endowment is facing losses in Broadband
Digital. Investment firms like Madison Dearborn, Hicks Muse and Whitney
have major exposures in DSL, while Morgan Stanley and other Wall Streeters
confront losses so large they don't want to talk about them.
DSL Prime knows we will be reporting more "casualties" as
finances hurt; we'll also be reporting that the underlying business will
be doubling over the next 12 months.
Telocity/Hughes to become
giant DSL ISP
GM money, 10M Direct TV customers,
national video play
One solicitation to Hughes's customer base and Telocity's biggest
problem will be how to service the volume of orders, which they expect
will top 150,000 in 2001. Patti Hart intends to solve that by "embracing
all the providers - BellSouth, Verizon, SBC and the CLECs." and with
GM's money behind them they are prepared to lose $120M in 2001 building
that base. DSL stock prices have gone down so much, companies looking
to expand will often buy, not build. The $180M buy instantly gives them
a high-speed service to offer their 10M video customers, to complement
the two-way satellite service they are about to launch.
Qwest is another company likely to buy; purchasing any of the DLECs
would be cheaper and faster than building their planned CLEC network.
Joe Nacchio didn't disagree when we asked him two months ago, but pointed
out "They could get even cheaper." MCI backed away from a Rhythms
purchase because the debt load was too high; Nacchio may be waiting for
a chance to buy NorthPoint or Rhythms from bondholders. But Rhythms has
cash on hand for another year.
Telocity is currently spending $400 to acquire each customer, including
$200 for the home gateway they provide each customer. That box, whose
cost should go down, allows one of the industry's first effective value-adds,
a $10/month package for security and home networking with a high take
rate. Partly because CEO Patti Hart is from Sprint and enthusiastic about
telephony, we've been looking to Telocity for wide consumer Voice over
DSL. They will have an offering soon, but Hart emphasized unified messaging
(answering, forwarding, fax, email package) will come before a full residential
telephony, to avoid the need for lifeline service. They are in a trial
with an interesting home video company, Villa Montage, which will continue
after the Hughes deal.
Telocity has some of the best customer policies for $39 residential service.
They offer static IPs, require no contract, and provide a modem with video
and networking ready to go. They are providing a new modem to all the
Phoenix residential customers they've just taken from Megapath. All of
this costs money in the short run, but in the long run should lower churn
and especially marketing costs.
Inadequate service costs
Telia 3G wireless license
Sweden insists on universal service
Incumbent telcos around the world have taken for granted their
continued licensing, and with impunity ignored the service goals of their
nation. Largely because of limited coverage plans, Sweden ruled the Telia
application inadequate, and gave 3G license to competitors (including
innovative high-speed provider Bredband.) SBC is committed to 100% broadband
coverage in one third of the US, demonstrating universal service is practical
for DSL/broadband as well, and DSL Prime urges regulators to demand it.
Verizon has confirmed positive value add delivering DSL to at least 85%
of homes, and we believe over 90% can be profitably served. British Telecom,
BellSouth, and Qwest are insisting they require subsidies to serve that
many customers, feeding at the public trough for what rational businessmen
would do even without incentive. In addition, they've convinced a few
well-paid legislators (Dingell, Tauzin, McCain, Moynihan) to propose eliminating
key long distance and competition rules, to give them "incentive"
to serve a smaller proportion of their population than GTE had planned
without subsidy or government mandate.
The AOL settlement - an
editorial
Make history by opening access to
content
Bill Kennard asked whether "open access" included caching
servers at the edge, at the open hearing on the AOL merger. We believe
the answer should be yes, and the AOL/FTC agreement provides a framework
to enforce that in its provision that all ISPs be given the same access
as AOL to the cable structure. If AOL wants to offer video, therefore,
which requires edge servers, then other ISPs can offer similar to Akamai,
Digital Island, Enron, Real and Cisco's content delivery networks, and
even the proposed Kendra public network.
The key freedom of speech issue of the next decade is access to the broadband
internet, the way new programming can be brought to tens of millions of
Americans. But the "closed garden" of the cable world - and
the shutdown of ABC on TimeWarner networks - points to the danger, that
only channels who cut deals with the cable/DSL networks will get carried.
Simply enforcing "truth-in-advertising" laws is the one way
to discourage gatekeepers on the broadband internet, and the AOL settlement
points to another.
Video cannot flow freely on the internet backbone, because
it requires megabit speeds and the backbone for the likely future does
not reliably run more than 200-300K. This means that video must be accepted
at the edge of the network, without obstacles or tolls. AOL, SBC, Verizon,
and the cable companies have claimed they deliver speeds of 640K to 2M
to the internet - but they cannot honestly make that claim unless they
are prepared to accepted traffic at that speed, and existing laws allow
government to challenge fraudulent claims. Unless they are willing to
run corrective advertising ("All our speed claims are from your house
to our nearest equipment, not your speed to the internet as we implied."),
they should offer a network designed for the promised speeds. The internet
was built on open peering, not the "closed garden" of the cable
world, and the only way to deliver the promised last mile speeds is to
accept traffic at your edge at those speeds as well.
Prevent discriminatory pricing locking
out competitors
Pricing designed to essentially exclude all but a few large ISPs
can defeat the goals of "open access", as already has been proven
by Verizon/Bell Atlantic, followed by SBC. The telcos talk about "open
access" and "choice of ISPs" but establish a de facto "shared
monopoly" with selected peers. Verizon's tariff allows their own
captive subsidiary and two or three peers twice the operating margins
offered to the average ISP. For the typical $39 residential customer,
Bell Atlantic allows its own subsidiary a $13 margin and the average ISP
$7. BA's "independent subsidiary" is sustaining heavy losses
at that price, and nearly all independents are eliminated. The result
is clear - over 90% of BA customers go to three or four ISPs, and we believe
the vast majority are retained by BA. If AOL and the other cable companies
are allowed similar pricing, most ISPs are dead, and "open access"
will be include only a few "oligarchs."
In the works: Enron/Blockbuster begins a 1,000 home trial
of video on demand, while Intertainer and Villa Montage have different
approaches; Jim Sackman of Advanced Fibre explains the advantages of channelized
voice, Gilder "Teleocosm" buy the book for the great gossip,
DSL gateways, video, and the DSL Forum at Las Vegas CES
Incoming:
·
Karen Breen of Rhythms wrote "Dave, a correction on
your Rhythms commentary. Rhythms did not "default" on its "Series
F" deferred dividend payment. We are permitted under our Series F
agreement to defer the dividend and allow it to accumulate. A "default"
would imply we were not permitted to defer the payment and in fact we
are. Please note this correction to your readers. Thank you." Words
like that are legally important, and we should have been more careful.
·
"My service stinks! Why don't you write about how incompetent
this provider is?" is a note we got this week and often previously.
They were writing about a large telco, but two weeks before the subject
was a CLEC. DSL service provider difficulties are so common, unfortunately,
that they no longer qualify as news. We report them, usually briefly,
but often enough that several companies believe we criticize them excessively.
Actually, we're gentler than their own people, off-the-record.
·
"Verizon shows what quality means" was our headline
that confused several readers. We applauded them for fulfilling 97% of
orders in 3 days and answering 97% of calls in less than a minute - in
their Florida telephony service. We urge Verizon - and everyone else -
to meet similar standards for DSL, and to be as comprehensive providing
the metrics to prove their quality claims.
·
"Rhythms, we're happy to report, hopes to cut back
sufficiently without resorting to layoffs." was our story, after
the company firmly denied the rumors we had heard. But the mail to us
disagreed "Wrong! I was a victim with about 40 others who got laid
off in November." was one note. Chris Hardman of Rhythms replied
"Rhythms is not going through a major reduction in work force, nor
have we done so in the past. ... That said, we are continually looking
for ways to improve our productivity and align each element of our organization
to better meet our business goals. ... we do eliminate positions from
time to time as we find ways to do the job better with fewer people. ...
This ebb and flow of people, both coming in and leaving Rhythms, has been
and will continue to be an ongoing part of managing our talent pool, which
we believe is one of the best in the industry."
Briefs:
·
DSL Prime readers should not have been surprised by the SBC
and BellSouth problems. In August, we wrote "The major telcos
in the United States have made unreasonable projections of income going
forward, and will have to struggle to meet the numbers and eventually
hit crisis. At some point, probably not immediately, the street will be
stunned and disappointed, as recently happened at Verizon. Local service
prices will go down with competition, LD rates are plummeting, and basic
growth is unlikely to continue at three and four times the growth in the
economy. We have seen this reflected in consistent underinvestment which
will ultimately catch up with them. Symptoms to watch will include overstated
writedowns." The proof is the massive service problems, (not just
DSL, as SBC's disasters in Ameritech territory prove, or the very name,
US Worst). Many telco folks have confirmed that cost cutting is excessive
since we first wrote this, and four of the five US telcos (including AT&T)
have since disappointed the street, citing "temporary" or "one-time"
problems. Look for telcos to use all their political power to raise local
rates (Qwest has already filed in Colorado), and an attempt by Dingell
and Tauzin to let them into long distance, nominally to provide an unneeded
"incentive" to install the DSL already in their plans. Wall
Street demands numbers, and Whitacre's compensation is tied to the stock
price they are trying to defend. But telephony is a declining business,
where demand is flat, costs going down and if there were competition prices
dramatically going down. DSL, wireless, and data services should be competitive,
without monopoly returns. So sales & profit growth, longterm, should
be in the range of economic growth (2-6%) plus at most a small premium.
Instead, seeking double-digit growth, AT&T blew tens of billions overpaying
for cable companies, while the baby bells have allowed service to deteriorate
so badly their reputation - and long run competitive position - is at
risk.
·
"Everybody loses their shirt at $40, even the telephone companies,"
Elizabeth Douglas accurately quoted us in the LA Times, but we'd like
to be clear we expect that to change. In telco volumes, with costs coming
down, we think Bell Canada's $26 (US) price should be profitable. Patti
Hart of Telocity reported her average bill is over $40; she expects the
base price to plummet, but additional services, including video, to maintain
the total. A drop to $30/month is the internal projection at SBC and AT&T,
depending on the market. With ten of thousands of customers, you lose
your shirt at these prices; in the millions, a well run operation with
added services should make money. ·
http://www.latimes.com/business/cutting/features/lat_dsl001221.htm
·
Ameritech's problems getting remote terminals into the field
were reported a week before the company announcement by David Rohde in
Network World. This is the third time this year Rohde has been first in
the national press with a major DSL story. He scooped us again! Carol
Wilson of the Net Economy also had a nugget: Covad's McMinn said
that with line-sharing they can and will offer a business service at $60-80
per month. The informal, opinionated style of The Net Economy is a pleasure
to read, especially compared to the barely rewritten press releases some
outfits present as "news".
·
Symmetricom is testing their repeater technology, good to 30,000
feet, at Chester Telephone. The telcos are already planning to use repeatered
G.shdsl to reach business customers four and five miles from the CO; we
surprised they are not at least actively testing the similar ADSL techniques.
Experts tell us they can work, and our close look at the manufacturing
costs of the units suggest that the prices will be reasonable - if the
telcos buy in quantity.
·
Domestic partner benefits have been added by BellSouth because
"we wanted to make sure we do everything we could to attract and
retain a talented and diverse work force" Nechole Merritt said. They
were the last of the Baby Bells to make the move. BellSouth folk will
now be welcome at the best parties in their headquarters town, very gay
Hotlanta.
·
BellSouth's $375M writeoff was only for their wireless TV
to homes, and specifically did not cover their fiber links, which they
are rumored to be expanding. Sprint - which is the telco to 8M homes as
well as a long distance company - also is believed to be buying fiber
to the home/curb gear.
·
Kudos to Nebraska Central Telephone, which makes DSL available
in all its offices, including those too small to pay for a DSLAM. Jason
Roblyer, Network Manager, explains "We have been able to quickly
and easily deploy single DSL lines using inexpensive point-to-point products
from Net to Net."
·
Westell's modem, widely deployed in BA and SBC territory, can be
upgraded by software to a mini-router for home networking, and Westell
has begun advertising the $50-100 upgrade.
Deals:
·
iMagicTV will work with Advanced Fibre for video
servers, which may or may not become part of SBC's Project Pronto. We
continue to be amazed that SBC is installing remote terminals with only
limited video capacity; we wouldn't want to go before the SBC board in
two or three years explaining that expensive upgrades are needed because
the company saved a very small amount by underspecifying the Alcatel and
AFC DLCs. In contrast, Alcatel's new 7300 DSLAM - soon going into
wide deployment in SBC, Verizon, and BellSouth - can deliver two megabits,
non-blocked, to every port - enough for a separate stream of video to
every home. Alcatel's deal with CoolCast is just the first of many video
services Alcatel (and their telco customers) will have available.
·
Earthlink knows Macs count too, and has arranged for free Norton
Personal Firewall software for Mac customers.
·
Pine Tree Networks, in northern New England, will deploy Jetstream
VoDSL equipment starting in January.
·
Accelerated's Siemens connection came through, signing Winstar
to Accelerated's largest contract yet. Winstar uses microwaves and fiber
to reach the building, and Accelerated will supply the basement DSLAMs
and CPE.
·
Paradyne Networks is selling DSLAMs to California regional
Sierra Telephone.
·
MegaPath and Telocity are now working together, with
MegaPath emphasizing business customers and Telocity individuals. Simone
Valle would not release financial details, but MegaPath had thousands
of ex-Phoenix residential customers to place and presumably is offering
a generous commission on business accounts in return. MegaPath's business
model is for well-paying, well serviced business customers, and they've
delivered above-average service. Taxin believes in frequently emailing
the customer during the wait for installation, with clear explanations
of what's up. (Earthlink and Sprint have told us they are doing the same,
dramatically reducing customer service calls.)
International:
·
Iceland will be ahead of the US in delivering video over
DSL, as GMi Digital, working with PixStream, plans to start service.
·
Telecom Italia officially launched their ADSL service. Suppliers
have been asked to quote on over a million homes worth of equipment.
·
DSL on the French Riviera? Absolutely, and with strong promotion
from France Telecom, which is promoting the 40 euro 500/128K service
throughout the country. ECI and Alcatel provide the equipment, and ISP
charges are extra. Thanks, F. for the tip. Next - when will FT start installing
the 100,000 lines of VDSL it tendered for?
Competition:
·
Powerline connections - fast internet over your power cable - have
been coming soon for a long time now, with disappointing trial results
to date. But Cisco's investment in Cogency suggests they think the time
is near.
·
RCN will cut 70 jobs, about 1% of the work force, and essentially
stopped their network build, as they lost $110M in the quarter and see
future financing a problem. Winstar, Teligent, and RCN are far more advanced
than any DSL companies serving in-building clients. They are smart, exceptionally
well-backed companies, but they are all in severe financial problems,
which cast a pale on their DSL equivalents, the BLECs
·
AT&T is looking at a $2B loss paying Cox and Comcast for their
shares in @Home, whose stock has plummeted almost as fast as the DLECs.
They are trying to pay with cable properties instead of cash, as their
cash position is so low they dropped the dividend.
Chips:
·
Power is critical to DSLAM design, so Tioga's Tom Sennhauser
comment in EET "new generations of line drivers about to hit the
market should consume half the power required by current devices"
is welcome. He just introduced the PeakADSL octal central-office chip
set, sampling in January, with a late 2001 price target of under $20/port.
Tioga, recently spun off from Orckit, is looking for additional customers.
·
Proxim and Virata released a reference design for a HomeRF gateway,
while ishoni and Centillium offer a design utilizing ishoni's "gateway
on a chip". Both confirmed to us bills of materials between $100
& $150, including telephony and home networking, heading down in the
course of the year. Jeffrey Schlesinger of UBS Warburg reported the cable
guys are choosing HomeRF, including Scientific-Atlanta and Motorola, who
produce 95% of the settop boxes. HomeRF is currently cheaper and has built
in telephony, the future cable revenue source. Most of the telcos and
DSL providers, especially in Europe, are leaning towards 802.11b, but
still undecided.
·
Singapore's Chartered Semiconductor, third largest foundry,
warned of reduced demand for chips going forward.
People:
·
Ron Cates moves to Vice President and General Manager of
Conexant's Broadband Access Business Unit, soon to be spun off to a new
company. Ron started in optical transmission at Vitesse, fell in love
with DSL technology in 1993, and has been in DSL ever since. He writes
"One thing you learn about in the optical backbone business",
he said "is that without a viable fat pipe into the premises, the
prospects reach an asymptote." Conexant has delivered millions of
SDSL and ADSL chips, and is close to market with a hot G.shdsl chipset.
·
Mike Borsetti who played a crucial role building NorthPoint
and VersaPoint, most recently as VP, Technology Strategy, is now independently
consulting. He'll continue spearheading the standardization work at the
DSL Forum (where he is Marketing Chair of the VoDSL working group) and
serving on the Board of the International Softswitch Consortium. Mike
tells us "I am excited at my new role, since as a neutral party I
can help the DSL industry develop the uniform, interoperable end-to-end
QoS solution without which there will be no revenues from advanced services.
After all, nobody will pay for content or a phone call if they get disconnected
every time the neighbor's kid fires up Quake, and with the increasing
success of DSL this scenario is becoming very real".
·
Mark Housman may provide some of the tools for that QOS,
now that he's become VP of Marketing iPolicy in Fremont after leaving
Paradyne.
·
Dave Farber, CTO of the FCC, was appointed a Fellow of the
ACM. He'll be returning to full-time teaching at Penn next month, and
has promised a report on what he learned in government. Numerous others
are looking to leave the FCC - some of the smartest people in telecom
are coming available. Bill Kennard is the great prize - his presentations
at industry events have made it clear he understands the industry as well,
or better, as the top CEOs.
·
Worldwide internet telephony enabler ITXC's COO John Musci will
leave the company in February, while Eric Weiss, Steve Ott, Tom Shoemaker,
and Luis Machuca move into leadership. Founder (and ex-Microsoftie and
AT&T exec) Tom Evslin believes "We see enormous potential from
both our phone-to-phone business and the new e-calling services that enable
communications better than on the PSTN".
Stock Market:
·
The current market cap of NorthPoint ($50M) and Rhythms
($60M) is considerably less than even the cost of developing their operations
system. The price only makes sense if the companies are overwhelmingly
likely to reorganize and wipe out the stock value, and they have little
hope of recovery. We cannot agree with those conclusions - but never read
our notes as a suggestion to invest.
·
How should an investor decide? Top analyst Dan Reingold of CSFB
thinks the telco fall presents "a nice buying opportunity in all
4 stocks." But Frank Governali of Goldman was quoted in the WSJ questioning
telco stock prospects "the strong recent stock performance is not
sustainable." He told us that statement should be placed in context,
referring to the relative performance of the telcos, not their absolute
price.
·
Chip stocks recovered recovered some, but have been battered. We
were one of the first to point out that production limits had been holding
up prices and that foundry capacity now coming available will probably
lower prices. But some perspective required: demand for DSL chips will
increase 150% next year, despite CLEC problems.
·
Goldman Sachs, Merrill Lynch and Salomon Smith Barney, combined,
were not strong enough to launch the IPO for interactive TV provider Diva.
·
Ciena spent $2.6B to buy optical component maker Cyras, and the
market drove Redback down several billion. Redback has a franchise
in subscriber management systems that control DSL networks, and a customer
list that includes almost everyone in the industry. But the $10B market
cap was based instead on the prospects of Vivek Ragavan's optical products,
which are in very early trials. The market is betting, heavy, that Redback's
optical units work as promised and become a blockbuster product, so they
were spooked when well-placed Ciena jumped in as competition in the optical
space. The longrun market for "subscriber management" is very
unclear. The equipment on both ends of the Redback are racing to eliminate
it. Rick Gilbert of Copper Mountain points out their DSLAM's "IP
IQ" can deliver the critical functionality of the current Redbacks
- his speech at the UBS Forum could have been called "Who Needs Redback?".
Alcatel and Cisco promise similar functions, incorporating more into the
DSLAM in each CO. At the pop, Zhone is close to delivering a "does-everything"
box, incorporating "subscriber management", voice gateways,
and more into the switch itself, and their Xybridge purchase adds softswitch.
George Hawley writes his new company, Gluon Networks, will also offer
a "does-everything" in the near future, and George's track record
(Diamond Lane, Bellcore, Dr. Switch) makes Gluon a company to watch.
·
Analysts following DSL are invited to join an April 25 panel at
the New York Voice over DSL conference. The guest list is already interesting,
including the CEO or CTO of Centillium, 2Wire, Telocity, Jetstream Communications,
Tollbridge Technologies, Mpower Communications, TdSoft, Network Telephone
Corporation, Sharegate, General Bandwidth, with more signing up. Contact
Dave Burstein daveb@, who resolves to make this one of the
most interesting shows of the year.
·
Netopia's S-1 reported $59M in cash and virtually no longterm liabilities,
or nearly as much as their $63M market cap. This is not a buy recommendation.
What if NorthPoint beats
Verizon?
A billion dollars at stake
No one can reliably predict this one until the jury comes in, we
believe after reading the contract and briefs. Clearly, we and others
made a mistake accepting Verizon's Nov. 29 claim "Verizon's obligation
to complete the merger was conditioned upon NorthPoint's business, operations
and financial condition each remaining materially the same as they were
at the time the agreement was signed. " The actual contract severely
limits Verizon right to terminate or back away from the transaction. A
"material adverse event" might give them grounds, and the writedowns
caused by financially troubled ISPs were well publicized. But
-
the contract specifically excluded from the MAE clause, "facts,
events, changes or effects that are generally applicable to (A) the
data industry, (B) the United States economy or (C) the United States
securities markets generally or the Nasdaq Technology Index in particular".
Obviously, data industry problems and the NASDAQ drop were a major part
of NorthPoint's problems. NorthPoint will contend the ISP problems were
a reflection of the general problem. Because Covad, Rhythms, 20 or so
visible ISPs, @Home, Lucent, and so many others have had severe problems,
Verizon will have a burden to show NorthPoint's problems were unique.
-
Other provisions spoke of termination only if the problem "is
incapable of being cured by NorthPoint prior to the Termination Date"
- August of 2001. The key "new" event - nonpaying ISPs -may
very well be cured by transferring customers to better-paying ones,
including GM/Telocity and Microsoft. This clause clearly gives NorthPoint
the opportunity to resolve certain problems; Verizon contends there
is no way to cure a MAE that "shall not have occurred" and
hence this does not apply. The contract has careful provisions for a
$100M payment if NorthPoint accepted a higher offer, fraud or deception,
government blocking the deal, or either party not fulfilling the requirements
of the deal. But the clauses invoked appear contradictory, probably
drawn by an attorney grabbing boilerplate off the shelf, for clients
who had no thought of breaking the deal in this fashion.
-
Is it material? $11-20M (our estimate for the extent of the loss)
is significant in comparison to current revenues, but 1% of Verizon's
own valuation of NorthPoint at 2.3B. NorthPoint's plan to transition
customers to stronger partners has a good chance of success before the
deadline next August, rendering long term damage to NorthPoint insignificant.
Legal definitions of "material" may be a question.
-
As we've previously reported, Verizon should have had at least
some knowledge before signing the contract of the ISP problem. They
presumably examined the quality of the receivables as part of due diligence,
and had direct experience with several of the ISPs. Verizon had its
own contract with Flashcom for a million lines.
NorthPoint has a clear plan to transition the ISP lines
to financially sound ISPs and minimize the impact. Bob Visse of Microsoft
was on the phone when the Verizon announcement came over, and confirmed
to us they would be expanding their NorthPoint line count. Microsoft's
ability to pay is clear. Very few of the endusers - the actual paying
customers - have cancelled, and are likely to continue providing revenue
to NorthPoint. Beyond that, the value of NorthPoint to Verizon was not
the customer stream or ISP relationships in any case, but rather the network,
operations system, and management. That's because Verizon itself was expected
to generate at least 75% of the customers of the combined entity, just
as now they have more than five times the subscriber count. There is no
question about Verizon.net's ability to pay their bills. The result: probably
well over 95% of the customers of the combined entity would be from ISPs
able to reliably pay - the ISP problem was not material to the future
of the merged entity.
The "cure" clauses suggest that Verizon would have been smart
to give notice to NorthPoint of the issues and worked to resolve them.
Such discussions apparently did not take place - as the deal was terminated,
senior staffers from both companies were in a meeting actively planning
details of the future entity.
Why Verizon terminated
Verizon clearly had many reasons to want to cancel the contract,
starting with a $500M dollar loss they would suffer based on the decline
in the DSL stock prices. By the end of November, they could buy all of
Rhythms, a comparable network, for a third of the $1.3B they were offering
for just 55% of NorthPoint. But if, as NorthPoint claims in their brief,
they wanted to terminate for "extra-contractual reasons", it
was clearly prohibited.
Verizon was under tremendous pressure to find a way to
get out of the deal. Merrill Lynch was telling Wall Street Verizon was
canceling, and the WSJ was reporting the rumor. Liz Fetter of NorthPoint
was told us at the time Verizon had not informed NorthPoint of any such
plan. The two were actively planning future co-operation, including a
meeting in San Francisco as Verizon at a high level terminated the deal.
Verizon separately purchasing One Point, who delivered
data through basement DSLAMs instead of COs, while improving management
of their own DSL division. Veronica Pellizzi, with a strong operations
background, moved to the management of Verizon DSL, and the GTE folks,
who had a much more successful deployment, assumed a greater role. Verizon
moved rapidly on their plan to install DSLAMs in virtually every CO, so
the NorthPoint equipment in one-third of the nation was virtually duplicated
Verizon's own. (NorthPoint's Copper Mountain equipment has an ADSL option,
while Bell Atlantic's Alcatel equipment will soon offer symmetric G.shdsl.)
NorthPoint's hard choices
NorthPoint's stock was valued at $1.5B in August when the deal
was made, and is less than $50M today. They will require several hundred
million in 2001 to cover the losses as the customer base grows, money
Verizon committed to provide. They were forced to lay off over 20% of
their workforce, and their cash on hand, without Verizon's $200M January
payment, is not enough to last through February. A $160M bank line would
carry them into the second quarter, if the banks remain willing to disburse
the funds. They were just forced to sell their European operation at a
giveaway price.
How much is involved?
Peter Thonis of Verizon told us "We were within our rights
to terminate the agreement in accordance with the contract." But
if they weren't the damages could be immense. A company valued over $2B
in August is now struggling to avoid bankruptcy, losses a jury could choose
to reverse and possibly add to punitively. A related antitrust suit, that
the telcos are blocking competition, is strongly backed by mountains of
documentation already on the table at the FCC. A similar mountain of telco
defenses is ready, but the treble damages of antitrust may escalate Verizon's
risk.
Our opinion
This is the hardest article we've written, and we thank all those
folks who gave us off-the-record comments. Frankly, we are humbled by
writing about a case of this magnitude, especially when the attorneys
we contacted strongly disagreed. DSL Prime's first draft of this article
speculated that NorthPoint would probably win if it got to court, based
upon court filings and statements by Verizon and NorthPoint. Peter Thonis
of Verizon, with guidance from their attorneys, responded with specific
facts that persuaded us to rewrite the article in terms of uncertainty,
and we thank him for the extra help - even if the piece is now much less
dramatic. We urge all readers to remember we may be interesting journalists
but issues like this require more than a journalist's skills to find certainty.
Ivan Seidenberg, Mike Malaga, we urge you to settle this
amicably. With funding, NorthPoint will play a strong role in one of the
world's fastest growing industries. Verizon, by settling, buys insurance
against a loss in court, and frees years of financial statements from
a major uncertainty. Verizon has not completely backed away from its plan
to grow out of region, and so Verizon can steer that work to NorthPoint
(like the Covad/SBC deal). Genuity, Verizon's future subsidiary, also
resells DSL, and provides backbone connections NorthPoint needs to purchase.
NorthPoint, alive, can again be a valuable partner; crushed, it has no
choice but to build the court case.
Key clauses:
Section 8.3 Additional Conditions to Obligations of Verizon. The obligations
of Verizon to effect the Merger and the Asset Contribution are also subject
to the fulfillment of the following conditions:
,,,
(g) Material Adverse Effect. There shall not have occurred any Material
Adverse Effect on NorthPoint.
-------
Section 10.4
(k) "Material Adverse Effect" means
(i) in the case of NorthPoint or Parent, any fact, event, change or effect
having, or which will have, a material adverse effect on the business,
operations, properties (including intangible properties), financial condition,
assets or liabilities of NorthPoint or Parent, as the case may be, and
its Subsidiaries taken as a whole, but shall not include facts, events,
changes or effects that are generally applicable to (A) the data industry,
(B) the United States economy or (C) the United States securities markets
generally or the Nasdaq Technology Index in particular, nor shall it include
any fact, event, change or effect caused predominantly by Verizon's involvement
in the transactions contemplated by this Agreement;
9.1
(ii) by Verizon, (A) if NorthPoint shall have breached or failed to perform
in any material respect any of its representations, warranties, covenants
or other agreements contained in this Agreement, which breach or failure
to perform (1) is incapable of being cured by NorthPoint prior to the
Termination Date and (2) renders any condition under Section 8.1 or 8.3
hereof incapable of being satisfied prior to the Termination Date, or
(B) if a condition under Section 8.1 or 8.3 hereof to Verizon's obligations
hereunder cannot be satisfied prior to the Termination Date;
Headlines
Dec 12, 2000
- Giants are coming
- Flashcom, Zyan, Relaypoint, Fastpoint
broke
- Covad's McMinn: "Blessed company,
first profound test"
- Vectris falters, Harvardnet flunks
- Nokia Ramps
- Catena raises $60M
- Fire the manager! Andy May out at Paradyne
- Verizon shows what quality means
- Briefs: FCC's Rosenworcel, Real/Microsoft/Sun improve streaming
video, Intertainer/Play, BellSouth optical investment, Winfire/FreeDSL
near 30,000, Zhone/Qwest, Viagate/Korea, AccessLan/Shift, Texas Pacific/ECI,
Legerity's new CEO, Adtran needs DSL revenue, Teligent's expensive capital
"The investment future in technology is brighter than at any time in
history." Tony Perkins, The Red Eye. We hope he's right!
"No significant residential competition"
is the future, according to two-thirds of the audience at the DSL Summit
last week. Covad's slowdown in consumer confirms it. If they're right, the
blunt conclusion is that US telecom policy has failed, because it requires
effective competition. DSL Prime thinks giving up is premature, because
at least five giants are unveiling major national plans.
Flashcom, Zyan, Relaypoint, Fastpoint broke
Covad reports Chapter 11 filings with
more to come
No surprises, the ISP problems are well known. Chapter 11 of the
US Bankruptcy Code gives a debtor great flexibility in reorganizing, and
we hope they will successfully do so. The common wisdom in the legal profession
is that companies make a terrible mistake waiting too long to file Chapter
11, because it suspends debts and requires approval of the bankruptcy judge
for many actions, possibly including the transfer of customers to another
ISP. Flashcom and Zyan have both told us they intend to emerge by concentrating
on business customers, and we wish them luck doing so. Richard Rasmus told
CNET he was forced to "monetize" the residential customers, selling
those served by NorthPoint to Telocity and those at Rhythms to Earthlink.
Covad, meanwhile, has introduced the "Covad Safety Net" to make
it easy for customers to switch, apparently without any payment to Flashcom.
We applaud Covad for taking care of consumers, but hope all legal rights
are respected.
Covad's McMinn: "Blessed company, first
profound test"
40% cut in next years' subs conserves
cash, EBITDA + in 2002
"We have gone far beyond my wildest dreams when I founded the
company. We been blessed from the beginning, are facing a profound test
now, and will emerge stronger." Now, McMinn has must administer strong
medicine. After adding 65K customers this quarter, and reaching 270K, they
project less than 190K additional in 2001, predominantly business. McMinn
told us they were going from 40% to 60% business customers. They've stopped
their buildout, lowered capex $100M, intend more cutbacks beyond the 13%
layoff, and ended market development funds and co-op advertising that have
been the lifeblood of the ISPs. Equipment and installs will lose most subsidy,
while they're actively pressing equipment suppliers for lowered prices.
Despite that, new customer costs mean a first year loss, and hence encreased
cash needs. They're going back to re-negotiate ISP contracts, and have placed
on intense credit watch even ISPs current in their payments. 26% of accounts
are in clearly troubled ISPs, 32% on watch. But McMinn projects 15 key (and
timely paid) accounts are enough to meet his projection, with volumes expected
from AT&T, Worldcom, Sony, Avon, Xo, and other "gold" resellers.
Covad is actively looking to move customers from weak to strong ISPs.
Consumers will be turned away unless Covad can
lineshare, a policy they vehemently denied earlier, and most will self-install.
DSL Prime believes Covad's long term business includes aggressive residential
deployment and McMinn confirmed that. However, we believe the numbers imply
Covad will take on very few individuals in 2001, primarily in support of
a few key partners. McMinn projects a cash "burn rate" down to
$60M/month, EBITDA plus by Q4 2002, no need for additional cash in 2001.
Vectris falters, Harvardnet flunks
Flood of failure not yet turned
Vectris layed off most of their staff home the moneymen pulled the
plug. They had wired 155 cities in ten states from Texas to Michigan, delivering
the business plan. But the DSL climate turned, and the money pulled.
Vectris, an Austin-based regional provider, that had $90M in financing,
Cisco had promised $60M in financing, and VCs including Austin Ventures,
Stolberg Equity Partners, Trinity Ventures, Lightspeed Venture Partners,
and Weiss, Peck & Greer had pumped in $30M. Cisco can handle the write-off,
if necessary, while other vendors (Efficient among them) have presumably
smaller exposures.
Harvardnet, with hundreds of COs wired on the East Coast,
laid off most of their staff and got out of the DSL business. After their
failed IPO, news has been hard to come by from these guys; in particular,
they refused to release subscriber numbers. They started with bright technical
folks and ambitious plans; the more "business-oriented" fixits
brought in this year obviously couldn't solve the problems.
At least 4 other providers face layoffs or worse.
Giants are coming
AOL, MSN, AT&T, Sprint, Worldcom,
Earthlink on the move
Existing customers will purchase hundreds of thousands of lines as
soon as the tap is turned on, and we believe it's being turned as we speak.
Each company has a similar strategy - establish a national broadband footprint
and sell broadband in volume as quickly as possible. All are technology
agnostic, planning to use DSL, cable, fiwed wireless & satellite to
reach homes, depending on what's available. A 10% take rate for DSL
from the ISPs below would be two million lines, and could be induced in
less than a year; the long distance telcos, each with an internet backbone
that keeps costs down, are five times as large.
AOL is already distributing DSL self-install kits
to computer stores around the country, and only the merger in Washington
is holding back the big announcement, currently scheduled for next week.
AOL signed up last year for a million lines from both SBC and Verizon. Their
28M subscribers include one-third of the US internet - three-quarters cannot
be served by Time Warner cable, and they will use DSL elsewhere.
Sprint has bet the company on ION, which includes 800
COs of DSL with a big sales push coming in January. Key offering is data
and two or four voice lines, with added value tiers at a higher price. DSL
will be the main technology, although they are building out fixed wireless
in some areas. Verizon has taken 1.5M long distance customers in New York
State - Sprint has no choice but to deliver on advanced servers to make
up for the erosion of their base.
Microsoft is running TV commercials for the MSN/Radio
Shack/NorthPoint deal, and tell us they'll move as fast as the industry
can reliably deliver. Bob Visse's strategy to to expand beyond the MSN direct
subscribers to the 210M around the world who access Microsoft on the internet.
"Home networking is critical to our plans", which requires broadband,
and they expect profits to come from added services: music, games, and telephony/integrated
messaging. Last week, he strongly reaffirmed Microsoft's support of NorthPoint.
AT&T, primarily a Covad reseller, briefed us early
this year they intended to offer ubiquitous broadband in 2001, covering
over 95% of the US. Covad is already seeing volume orders, and AT&T's
strong presence at DSL events make their interest clear.
Worldcom has extensively trained their sales force to sell
business DSL, and has contracted with Rhythms alone for 100,000 lines. CEO
Bernie Ebbers in June said 2001 would be the year, and back in 1999 said
they would be competitive for consumers as well.
Earthlink has 100,000 DSL customers, making them the
largest independent ISP, and are heavily advertising their quality support
to win new clients. They also picked up Flashcom residential clients, and
several other ISPs are looking to cut a deal. They inked a TimeWarner cable
deal, and have added satellite, but expect 70-80% going forward to be DSL
- if the industry can deliver (Pac Bell burned them bad this summer).
Sure, field problems continue, but the telcos
have improved installs (unofficially, Verizon is at 3,500 a business day
and SBC has hit ten thousand) as truck rolls become a feature of the past,
with 90% customer self-install rates. Covad planned 90% line-shared self-installs
by the end of December, and Rhythms & NorthPoint similar. We urge
the telcos to release customer service metrics, which we believe would confirm
things are getting better.
Catena raises $60M
Ex-Nortellians putting voice/data
together from chips to systems
$60M from Goldman Sachs, with Berkeley International/London Pacific
and Attractor Investors, proves that funding remains available for DSL companies.
The money will support 175 engineers in Kanata, Ontario, including much
of the 1 meg modem team. Steve Bauer reports "We are integrating POTS
and DSL into the same data path -- thus eliminating POTS splitters -- and
have more than 20 patents in this area." He believes Catena will require
lower power and deliver higher density than others, like Infineon, developing
"digital POTS Splitters." Key targets in the "post-DSLAM"
era are the line cards in DLCs and the switches themselves. Reference designs
from Infineon and Legerity already offer DSL + POTS in the same form-factor
as voice-only cards; Catena is keeping most product details quiet for now,
but is presumably heading for the same market.
Fire the manager! Andy May out at Paradyne
Building international, reorganizing
Losing sports teams fire the manager, whether or not he's the problem,
and the trend seems to be moving to industry as well. Paradyne bet heavily
on the success of Dreamline in Korea, who backed away from some of the world's
toughest competition. US sales will be reduced by the failure of key customer
Harvardnet and the end of the network build at NAS and Rhythms. Ultimately,
that meant heads rolling in Florida. Paradyne's plans going forward include
expansion internationally, where Paradyne already has a strong base, and
focus on products for frame relay/SLA verification as well as DSL. Ever-popular
Frank Weiner shifts to VP, Corporate Marketing and Advanced Technology,
with Paul Floyd taking more responsibility for DSL and Scott Eudy international.
Paradyne has a rich history (including being an early home for many of the
industry's managers) and a key product advantage - greater reach from their
DSLAMs, as reported by customers in the field. COO Sean Belanger moves to
CEO, while May remains as a "senior advisor" and board member.
Nokia Ramps
Secure routers and wide VAR relations
purchased for $120M
In the US, Nokia has Covad (who just froze their deployment) and
little else, but they are expanding rapidly around the world; in Europe
their execs are pledging to rise near the top in market share. Nokia last
year purchased George Hawley's Diamond Lane , and now has bought Ramp for
a CPE product. Ramp brings a respected product, a wide VAR channel,
They have a gorgeous wireless home gateway just hitting the market, and
their Rooftop distributed wireless system is a natural complement to fill
in the gaps in a DSL service map.
Verizon shows what quality means
DSL service should match
Verizon/GTE proudly reports their services results for Florida telephony
customers; we only hope that Verizon and others match these numbers for
DSL:
Orders installed in three days --97.1 percent
Out of service repaired in 24 hours --97.1 percent
Customer Sales and Service Center answer time -- 97.2 percent of calls answered
within 55 seconds
Briefs:
- "All the FCC Commissioners believe strongly in competition"
Jessica Rosenworcel of the FCC told an intensely interested audience
at the DSL Summit in Palm Springs. She urged the industry to get
involved in crucial decisions that will shape the competitive landscape.
In particular, she spoke of 251 (unbundled elements) as the rules of
the game, and 271 (long distance approval) as the structured incentive,
and pointed out several key issues the commission sought comment on.
Article in next issue - email the editor if you need a copy as
soon as it's ready. Meanwhile, attorneys in the field should check the
Texas long distance approval for a reference to line-splitting. A data
CLEC can lineshare with an incumbent, but the FCC also addessed line
splitting with a different voice carrier.
- At Streaming Media West, Real is touting a new content delivery network
standard (with Akamai & others), Microsoft introduced a new codec
designed for decent quality full screen video at 500-800K, and Sun is
leading an effort for a media format not dependent on either. Meanwhile,
Intertainer, live in Cincinnati Bell with Video on Demand to a settop
box, announced a deal with Into/Play for computer games on demand as
well. NorthPoint is well along in broadband tests.
- BellSouth invested $4.5M in Israeli optical switchmaker Sivcom. BellSouth
is quietly making some interesting moves, including satellite broadcasting,
internet switchpoints, and tripling DSL next year. Companies that followed
the herd - like AT&T buying cable companies for market share - haven't
done as well.
- Winfire/FreeDSL is now delivering service through Verizon in New York,
moving towards 30,000 subscribers by yearend. The majority choose the
paid service at a higher rate. Watch these folks - they're building
a more robust network than most, a strong OSS, and an operation strong
enough they are signing OEM partners. In this stock market, of course...
Deals:
- Zhone, the one-box-does-it-all folks, got a big boost towards their
pending IPO from a joint development agreement with Qwest. They are
in active trials with Birch and other smaller carriers.
- Viagate hopes their distribution deal with Huneed in Korea will allow
them to break into Korea Telecom's VDSL plans. Neither KT nor Hanaro
have announced a second source to Next Level.
- Calgary's Shift Networks ordered 50 basement DSLAMs from AccessLan,
which flexible, inexpensive units.
International:
- Israel's ECI Telecom, DSLAM supplier to DT, is close to selling a
telephony division to Texas Pacific, parent company of Paradyne and
Globespan, according to Haaretz/The Marker.
People:
- Legerity, the AMD spinoff with interesting voice + data chips in the
pipeline and an Alcatel license, named Ron Van Dell CEO. Before a stint
at Dell Computers (not a relation, we believe) he was vice president
and general manager for Harris Semiconductor’s communication business.
Stock Market:
- Adtran's earnings shortfall (down over 70% from predictions) was caused
by disappointing sales to telcos. They've worked very hard to become
a factor in G.shdsl, and expect production volumes in 3-5 months for
this very hot market. They're also first, we believe, with a central
office IAD for VoDSL, which Turnstone has integrated into an interesting
lifeline cutover system.
- $250M from Rose Glenn Capital bailed out Teligent, whose key strategy
- connecting fiber/wireless to a building - is not yet producing cash.
But CSFB's Mark Kasten pointed out the price was 51% dilution of current
stockholders, in return for cash that won't carry them through 2001.
- CSFB analysts Jamie Kiggen and Rick Vallieres took a trick from investigative
reporters, signing on for a week's work incognito at Amazon.com. Proves
that not all Wall Street analysts get their opinions from management
briefings. No report on whether they are joining the unionization effort
at Amazon.
Headlines Dec 2, 2000
- The killer Napp
- 70% of Napster users on broadband
- AT&T's Odlyzko: Net growth is much
slower
- Crowe of Level 3: Backbone costs will
topple
- Kingston looking for $B from UK partners
- Venezuela - 15,000 DSL lines is just
the start
- Starr to Sorbara at T1E1.4
- Telcos win - but can lose
- $1B loss in reciprocal comp for telephony
CLECs
"I was a Covad layoff. Please switch my email."
One of the casualties of the new mantra "funded until free cash
flow positive"
Michael Powell is intelligent, informed, hard-working
and respected by those he works with - important and appropriate qualifications
for the FCC Chairmanship he's likely to receive. Being Gen. Colin Powell's
son doesn't hurt his political chances, either. He prefers not to insert
government into decisions, "Only private firms suffer the consequences
of misplaced bets. As a consequence, our crystal ball is much cloudier than
theirs." Like most who choose government service, he cares about protecting
consumers and promoting diversity. No rigid supporter of business, he strongly
believes in competition, which in practical terms will require strong decisions
preserving the CLECs. Geeks will be happy to know he understands, for example,
why AOL is lame by our standards, but he added "but it's perfect for
many people. My mother-in-law loves it."
The killer Napp
70% of Napster users on broadband
Nothing generates demand for broadband better than
file sharing, per Doug Shapiro of BofA, one of the most interesting Wall
Street analysts. He summarizes " Napster may be the fastest growing
information technology ever. And, as illustrated by our analysis of 2,000
Napster users, P2P may be the broadband killer app. The explosion of P2P
and distributed computing will be a challenge to service providers, but
we think it will be more boon than burden. Our conclusion is that while
many pundits have realized the significance of Napster in the evolution
of computing (and as a challenge to intellectual property)… …Few have grasped
that it could be the broadband killer app because, to work tolerably, it
essentially requires broadband. Whether Napster survives in its current
form seems immaterial; P2P is here to stay. Lacking any centralized database,
Gnutella and similar programs can’t be shut down. DivX;-) could enable the
“Napsterization” of movies. " We're less optimistic about thwarting
the police, but are very glad to post his complete report.
AT&T's Odlyzko: Net growth is
much slower
Big difference in demand if doubling
yearly, not 120 days
Bill Kennard of the FCC, and Kathleen Earley of AT&T
are among our sources for the common claim that backbone demand doubles
every 100-120 days, but AT&T labs math researcher Odlyzko has updated
his numbers that directly contradict that result. If he's right, this will
revise many estimates of needed network and DSLAM capacity, including ours.
http://www.cisp.org/imp/november_2000/odlyzko/11_00odlyzko.htm
Crowe of Level 3: Backbone costs will
topple
Dropping 40-50% per year
"We don't worry about over-capacity with Internet
demand doubling every four months. We intend to ride that growth by lowering
prices dramatically - 40-50% per year. Increased demand as prices come down
will more than make up for the lost revenue" was the good news
for DSL providers who need to buy.. With one of the largest fiber builds
in the world, Crowe is in a position to make his forecast come true, whatever
the growth rate proves to be.
Kingston looking for $B from UK partners
Losing money, can't go it alone
Kingston, a local phone company with nationwide plans,
has 8,000 subscribers on one of the most advanced DSL systems in the world.
They are the showcase for Newbridge/Alcatel's Video over DSL, and intended
to compete in most UK central offices. Because the capital markets turned,
they have scaled back their planned investment to several hundred million,
at most, and are looking for well-endowed partners to build the complete
system. OFTEL's effective delay of BT competition
is driving most providers out of the UK market.
Venezuela - 15,000 DSL lines is just
the start
Verizon/CAN-TV must beat back $3B
from foreign telcos
DSL will be a critical weapon for CAN-TV (26% Verizon
owned) as Monday's telecom deregulation is bringing $5B of investment. Telecom
Italia's Digitel plans for 1M customers, and BellSouth looks to spend $1.5B.
Telmex/Bell Canada/SBC plans a $500M investment in Genesis. Most will
go into wireless telephony, which already has 60% more subscribers than
landlines, but every company plans a highspeed data offering as well.
Can-TV CEO Gustavo Roosen denies rumors CLECs are having a problem since
Monday's deregulation "There has never been any necessity to call (telecommunications
regulator) Conatel for it to intervene." (quoted by Charles Roth of
Dow Jones).
Starr to Sorbara at T1E1.4
Key issues come here
Tom Starr's done an extraordinary job for 11 years,
managing the most important industry group other than the DSL Forum. He
writes "I went out on a high note, our most productive meeting ever.
We approved the spectrum management standard! This is the first standard
of its kind, and will serve as a technical foundation of unbundled loops.
This standard (originally proposed by Ameritech) averts an impending crisis
due to uncontrolled crosstalk in the loop plant. This sort of non-event
tends to be ignored by the press, so it would be nice if you could help
people appreciate that this time we closed the barn doors before the cows
got lose. " Standards work is invaluable, and participation often gives
companies an early start on new products. Centillium's lead in Japan and
Paradyne's early certification in the UK were enabled by their work on standards.
Massimo Sorbara of Globespan, currently vice-chair, takes over, with Ron
McConnell of Lucent secretary. Starr moves to vice-chair, as required by
term limit rules of the committee. Repeaters, VDSL, splitters, and more
are on the agenda.
Telcos win - but can lose
Destroying competition could bring
back regulation
Qwest's Joe Nacchio has petitioned for consumer rate
increases, claiming effective competition could replace regulation. But
everyone realizes the problems of NorthPoint, Covad, and Rhythms put the
telcos in a commanding position, but the financial emasculation of the data
CLECs is risky for the telcos. Even the most conservative economists (Furchgott-Roth
of the FCC, for example) recognize capitalism requires competition, and
anti-trust or regulation is required to deal with monopolies. The Verizon
shutdown of the NorthPoint deal occurred the day after George Bush's election
was confirmed, probably not a coincidence. The Republicans in general have
protected the telcos, especially folks like Billy Tauzin, likely to take
over the Commerce Committee with the help of literally millions in telco
campaign contributions.
$1B loss in reciprocal comp for telephony
CLECs
Legg Mason's guess as FCC nears decision
Kennard vowed to settle the issue by the end of the year, and if
he doesn't, Billy Tauzin, likely new chair of the House Commerce Committee,
has a bill on the table. Either way, the amounts will be dramatically reduced.
The data CLECs won't be affected, but the voice CLECs will take a major
hit. Deals with DSL companies will be one of the best way for Focal, Allegiance,
and similar telephony oriented CLECs to replace that revenue, so we predict
a surge in VoDSL arrangements. We explore partnership issue in VoDSL News.
Incoming:
- Kevin Walsh of Accelerated shouldn't have been unhappy
with last issue's write-up, which called him "invaluable"
for his positioning the company as a Voice over DSL leader. But the
context was the 40% stock drop, which neither we nor he would want to
imply was caused by his resignation to head Irving Networks in southern
California.
- New Mexican Treasury Secretary Gil worked for Avantel.
Thanks, Tony Kozuch for catching our misspelling.
Briefs:
- Don't underestimate Winfire/FreeDSL. They expect to
have 30,000 live customers by the end of this month, and their operational
backbone is sophisticated enough that two ISPs have signed on with them
for services.
- DSL.net's 141 layoffs are unfortunately just one of
many announcements to expect as companies slim down to preserve cash.
Rhythms, we're happy to report, hopes to cut back sufficiently without
resorting to layoffs.
- If Verizon is a data company, will CEO Ivan Seidenberg
continue to read Telephony? Last spring, Seidenberg and Ed Whitacre
of SBC both told analysts their companies were shifting to a data focus,
and should be valued that way. Ziff-Davis has put Carol Wilson in charge
of the new periodical, "The Net Economy", aimed directly at
folks like that and the readers of DSL Prime. She's already produced
several strong issues, with an irreverence we enjoy, and we're sure
it will build a strong audience. Subscription are free. Meanwhile, Carol's
previous home, Inter@ctive Week, has a spiffy new design and continued
strong reporting. Telephony, of course, continues as a must-read, for
S. and most of the industry.
Deals:
- CopperCom sold their LeXSS switch/VoDSL system to PriorityOne
in Oregon.
International:
- Korea Telecom and Hanaro are moving ahead on VDSL,
but more slowly than expected, according to UBS Warburg's report on
Next Level. Anton Wahlman and Long Jiang at UBS cover a very wide range
of broadband companies, and the corporate resources (85 analysts in
Korea alone!) give them international backup. We especially appreciated
another feature of the analysis: UBS is looking at price/earnings ratios
rather than sales, putting emphasis on actual profitability.
- Dishnet now is offering DSL in Mumbai, Delhi, Bangalore,
and Chennai. A national provider (POPs in 25 cities), they plan direct
international hookups and are buying web sites in English and Indian
languages to provide content. Several companies have announced fiber
backbones, competition laws are pending, and we anticipate more DSL
offerings shortly.
People:
- Mark Peden has played crucial roles at Intel, NorthPoint,
and the DSL Forum. He's now moved to Simpler Networks, and writes "I
will continue to be involved in and lead industry groups addressing
the need for automating the provisioning process and enabling any-to-any
test access for DSL and other broadband access technologies. I
will continue to provide front-line evangelism and education on the
technology, as well as maintain my role on the Board of Directors with
the DSL Forum. What these folks have developed addresses the last missing
piece that will allow service provider deployment to scale -- physical
layer provisioning. I got so excited about what I Simpler, I decided
to join the company."
Headlines Nov 30, 2000
- Long court battle guaranteed if NorthPoint
sues for welching
- Anti-trust claims could reach billions
- Verizon DSL fallback
- Allies at equipment vendors
- NorthPoint, Rhythms, Covad prospects
- Growth in sight
- Crosspoint walks from $1B VC fund
- Tears as Zyan lays off 70%
- 40% drop after Walsh, Vogt leave Accelerated
The cold equation for NorthPoint:
Sept 30 cash on hand $52M. Short term investments $97 Total: $150M
cash burn Q3 $90-110M
Likely out of cash: Q1 2001
DSL Prime was wrong last week, thinking Verizon would go through with the
NorthPoint deal, an inexpensive way to expand nationally and acquire some
first-rate management.
We offer a toast to the deal that might have been, and
hope to be surprised by universal great success. Our previous assumption
- that NorthPoint would have several quarters - was based on projections
that included a $200M payment from Verizon on January 1, which will not
happen.
At the DSL Summit in Palm Springs, say hello to the round
fellow with a beard, Dave Burstein and the irrepressible Jennie Bourne.
Wish we could also be at the DSL Forum in Oregon - look for some real achievements.
We'll have another issue Saturday before we go.
Long court battle guaranteed if NorthPoint
sues for welching
Verizon believes that they are
excused from the contract of sale because of a clause about "material
adverse effects" - but a drop in a stock price is not a material event,
and that was the primary reason they walked. Verizon's lawyers clearly believe
the non-payment by ISPs and revenue reversal may qualify. But the facts
will make it a hard case to argue. Due diligence on the original deal presumably
identified some of the credit problems, which should have been known to
Verizon. Verizon has a hundred thousand line contract with Flashcom, one
of the key late payers, so presumably is well informed of ISP issues. The
long delayed merger closing (expected to take till June) virtually ensured
there would be substantial changes during the interim, which presumably
raised the threshold for "material". Clearly inaccurate
was Verizon's Babbio claim "We have no further obligations [due to
changes] in business, operations, and financial exposure." Operations
and most business aspects are in major particulars being delivered by NorthPoint
as planned.
Anti-trust claims could reach billions
NorthPoint, and all the CLECs, have documented in
enormous detail problems caused by the telcos, which have had a major impact
on their competitors. Verizon has obvious defenses, but the claims are substantial
enough to be argued for years, a cloud Verizon would not want to present
to investors. Babbio implied they were unlikely to resell NorthPoint services,
so NorthPoint has little to lose gambling on a suit. If forced into reorganization,
the trustee would be almost obligated to examine this claim. Natural
addons to the suit would include ISPs damaged by Verizon's virtual exclusion
of most ISPs in BA territory - by tariff and practice - which can be easily
documented.
Allies at equipment vendors
Cisco fronts $50M to Rhythms; Nokia, Nortel, Lucent want in
Alcatel and Cisco own the US telco
market, so well-funded multinational vendors continue to chase CLECs - possibly
assuming financial risk. Lucent got burned by losses at JATO, and several
CLECs are going to hurt the vendors, so financing will be tighter. Telcos
around the world predict capital spending flat for the next three years
(Qwest sees 2002 lower than 2001), so CLECs remain critical for growth.
The gross margins very high on the needed equipment - especially telephony
and packet switches - tempting vendors to finance deals, even if Wall Street
is critical.
Verizon DSL fallback
Haven't delivered to date
Babbio said Verizon is on track
for 500K subscribers EOY, currently installing 3,500 per day. 90% are customer
self-installed. 1700 COs equipped 60% qualify, 26M lines. But that is far
behind earlier goals - Bell Atlantic alone was expected to be at 500K by
now. They are required to spend $500M out of region, which will be directed
at business, not residential, customers. Most will be to enterprise customers
through Genuity and MFN fiber (10% owned.) Goal is to become a "nationwide
broadband company".
Crosspoint walks from $1B VC fund
Funded Covad, Efficient, DSL.net,
Jetstream, Eziaz, New Edge, OnSite Access, BlueStar, Diamond Lane - now
in recovery mode
Partner "Rich Shapero is Mr.
DSL" (Dan Moffat), but the struggling portfolio led them to turn down
$1B in committed investment in a fund set to close Friday. They didn't see
how to make money in the current market - and have years of repair work
to do. Partner Seth Neiman told the Merc "I'm fully employed for five
or six years, even if we never raised a new fund." Shapero quotes Blake
"The road of excess leads to the palace of wisdom." We've had
the excess - now, the wisdom is even more needed.
NorthPoint, Rhythms, Covad
2000 COs, strong staff, improving
operations, cash on hand to turn things around
No guarantees, but we think the
bears will be surprised. They all have coverage of 40% of the US, international
ventures, and a backlog of demand for the likely future. All the CLECs have
provided consistently better service than the telcos (although not nearly
as good as they should). Capital expenditure should plummet the in the next
few quarters, as each has completed the basic build of over 2,000 of the
2700 large COs in the US. Most of the operational teething pains are past,
and even the interface with the telcos gets better every month. After all,
eight months ago, the smartest folks on Wall Street thought these stocks
were worth twenty times today's price. DSL is going to double next year
- the underlying business is great, even if the market isn't.
But the stock declines have been brutal. 97% for Covad
and Rhythms, 94% for NorthPoint - before today, when Rhythms and NorthPoint
dropped to levels that assume imminent bankruptcy. Rhythms, in particular,
has a cash reserve that should prevent that, despite the market panic. They
did default on dividends on the preferred stock, however. Takeover talk
continues.
Growth in sight
"Our existing NorthPoint relationship
will not be effected by the Verizon news. We're still committed to making
broadband grow and see extraordinary demand" Bob Visse, Microsoft Network
who was on the phone when the news came through. AT&T, MSN, Worldcom,
Allegiance, @Home, Xoxo, Verio are all ramping DSL very rapidly in the next
few quarters and can pay their bills.
Tears as Zyan lays off 70%
No more hot IPO, profitability the
only goal
"There were tears flowing
- both with the President and the staff." co-founder Terry Lee writes,
as Zyan has gone from promised IPO riches to layoffs. "We downsized
to reach breakeven/cash flow positive in the next few months.Staff reduction
was about 70% (about 160 people), not the 80% reported. We have a strong
revenue base with strong margins to continue operations." Rumors
abound about similar problems at Flashcom, InternetConnect, and many others,
but are not yet confirmed. Zyan was a leader in reselling through smaller
ISPs, who are scrambling to find a home for their customers. Justin Beech
of ever-invaluable DSL Reports established an open forum to make these contacts
easier.
40% drop after Walsh, Vogt leave Accelerated
Kevin's VoDSL positioning invaluable
The stock decline presumably had other causes,
but Walsh leaving for a COO job in Irvine is a major blow. The stock had
a remarkable IPO run that was only possible because Kevin persuaded the
industry and the press they were a hot Voice over DSL company. His polemics
for SVC's and other Accelerated product features enlivened many a conference.
Kathy Tebben has also moved on, and Fima Vaisman is the new marketing
VP.
Briefs:
- Covad's layoffs of 13% are part of a plan to reduce
expenditures by 25% which will require closing offices and many other
cutbacks.
Deals:
- Nortel/Shasta had a breakthru at BellSouth. David Kettler,
chief architect, BellSouth, and a net pioneer, explained the Shastas
will allow them to ``evolve beyond access to offer new Internet services
that can deliver high-speed DSL access and differentiated, business-class
VPNs to our customers.''
International:
- More competition may be coming to Mexico, as Gil, head
of alternative telephone provider Adventil/Worldcom, is expected to
be named Treasury Secretary. Telmex has done almost nothing in DSL,
although it is controlled by Carlos Slim and SBC, who have been investing
heavily in DSL in the US.
- SBC, Bell Canada, and Carlos Slim/Telmex are closely
intertwined, and closed their $4B Latin American expansion arm. Wireless
is the LA growth engine and the presumed focus of the venture.
- As competition comes to India, traditional monopoly
VSNL dropped internet and international leased lines as much as 75%.
- Japan's deregulatory process is moving rapidly, as
business fights NTT's uncompetitive rates and government steps in. NTT
, in response, just dropped wireless DoCoMo prices 20% and POTs 10%.
Cost to deliver most telephony services, of course, have moved down
dramatically with technology, but in the US, at least, telcos are planning
increases instead.
People:
- Mark Norris of Motorola took over as CEO of Next Level,
as Galvin is exercising his 80% control over the VDSL leader.
- Marianne Berry, one of the most delightful folks in
the industry, left Verizon to become CMO of internet company Flooz.
- BT's Chief Technologist Peter Cochrane left after thirty
years for a startup. Some extraordinary engineers at BT, including several
of the pioneers of DSL, have also been disappointed. Gavin Young's moved
to Adevia, and we wish Jim, Gavin, and crew would free us to report
what they are up to there.
Stock market:
- Ken Moelis, star junk bond dealer, jumped from CSFB
to UBS Warburg, where he will be looking to snag some telecom deals.
The Times suggested Frank Quattrone of CSFB Palo Alto outranked him
on technology deals, so he looked for greener pastures. The WSJ reported
that another former DLJ telecom banker, Lewis Friedman, is moving to
Bear Stearns, attributing the moves to culture clashes between CSFB's
bureaucracy and DLJ "feeling of a small, elite meritocracy."
Financing a DSL company in today's Wall Street climate would be a great
way for one of these guys to prove their skill.
- iMagicTV's 20% drop on the day of its IPO reflects
the tech decline in general and the shortterm prospects for video over
DSL in particular. Gilder may be dreaming of infinite bandwidth, but
the networks we know are chokepoints above 300K is so, not quite enough
for video. Tuesday was a disaster for Merrill, with all three telecom
IPOs falling on debut. Telekom Austria and Alliance Fiber both also
dropped.
- Telecom analysts have one last big paycheck, this year's
bonus, earned by the extraordinary profits early this year. But without
an unlikely market recovery, next year will be tough.
Headlines Nov 22, 2000
- Fetter: Verizon isn't backing out of
the NorthPoint deal
- ADI, 11,000,000 ports strong, buys
into G.shdsl and integration
- Legerity high voltage chip combines
voice and DSL
- G.shdsl on the way
- Siemens delivering 600,000 lines
- A look at the hard times
- Let's hear it from the chief: CEO comments
from Aware, Level 3, Centillium, Globespan, Orckit
- How to help: a primer on keeping the
CLECs alive
" Any support you can give would be appreciated!"
A DLEC executive
The best support we know how to give is reporting
and analysis, so we worked most of the night on the piece below, how regulators
can help the CLECs to survive, a goal we believe Democrats, Republicans,
and most of the industry shares. We expect disagreements, and welcome your
email responses, both on and off-the-record. The telco 75% DSL market share
may be good news for their suppliers, but US telecom policy is based on
competition, and totally fails without the CLECs.
Truth-in-advertising is our first recommendation.
Allowing deceptive advertising drives out superior services. Higher quality
telco services - especially fast and reliable provisioning - benefits everyone,
including CLECs who won't need multiple truck rolls because of problems.
Enforcement of existing rules, Jeff Blumenfeld and Jason Oxman agree, is
absolutely essential.
The rest of the argument is long, so at the
end of the email. But don't miss the last part, about ISPs. The dirty secret
of the industry is there is no open access on the telco side, either. Pricing
(the "AOL tariff") is discriminatory (especially in Bell Atlantic
and SBC territory), while Covad, we reported, has been turning away all
but the largest ISPs since the spring, even before the financial problems.
Don't just forward this email - subscribe your colleagues for free.
Just reply to this and say "subscribe <email address>".
Fetter: Verizon isn't backing out
of the NorthPoint deal
Investors scared, but the deal still
makes sense
Liz Fetter wrote us "the merger is on track.
We have not been approached by VZ and have kept them in the loop very closely
on the ISP issue. I remain even more committed to the business, and feel
our deal is the way of the future." We believe her - CEOs of public
companies know how to say no comment and why not to lie. Merrill Lynch started
the story, telling clients late last week that Verizon was trying to get
out of the deal, and rumors swirled the street. They were reported by Shawn
Young in the Wall Street Journal, along with NorthPoint's denial. After
the WSJ story, Verizon will probably be obligated to look closely at the
contract, which contains a "material adverse change clause",
and obtain some concessions. The stock price has gone done dramatically.
But they'd be fools not to complete the deal.
Verizon's future is out-of-territory growth. The national
wireless customer base is about to surpass the regional wireline.
SBC and Qwest are coming into the home territory. They've inked a $2B fiber
deal with MFN. CEO Seidenberg says it clearly. So NorthPoint's 2000 COs
are the fastest way to get there. NorthPoint's management team is excellent,
and badly needed in Verizon. NorthPoint's nominal independence gets around
many regulations, but with 55% ownership and most of the customers, control
is complete.
Wall Street rumors are powerful, but not
always accurate. We had a hand in spreading one this week, from what we
believed a good source, that Rhythms was facing layoffs, but have since
been corrected by the company. Apparently, we were wrong. Rhythms cash hoard
will last through 2001, so they are under no pressure to make a deal at
today's low prices.
** Be sure to download Paradyne's newly revised DSL Sourcebook. This
award winning book is a comprehensive resource on DSL, and includes an introduction
to Service Level Management for DSL providers. Check it out today
at: http://www.paradyne.com/cgi-bin/return?url=page00sbdslp.pl
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ADI, 11,000,000 ports, buys into G.shdsl
and integration
Chiplogic brings custom design,
Thomas Neuroth symmetry
11M shipping this year is such a remarkable figure,
a leading competitor wrote us he didn't believe it. Only mighty Alcatel
clearly is ahead. But we believe the number, and not just because public
companies like ADI are unlikely to lie in public. They are supplying the
majority of the Korean deployment (Hyundai, Samsung) and the German as well
(ECI). We were similarly skeptical about Conexant a while back, but confirmed
with their clients (Copper Mountain, Nokia) and their clients' clients (Covad,
NorthPoint) where the chips were going. To avoid unnecessary truck rolls,
they were installing DSLAMs full of line cards, well ahead of actual demand
from endusers. ADI also provided us off-the-record details about customers
that back up their claim. Their second figure, 30M line drivers, illustrates
the overall size of the industry; yet another piece of good news from operations
that belies the financial agony. They expect to double that figure next
year, and now have advanced integration capabilities (did anyone say gateway)
and a product for the likely boom in G.shdsl.
** Virata's Next-generation Integrated Software-on-Silicon (ISOS) Platform
Delivers Unmatched Performance and Functionality with its New Security and
Autoprovisioning Features. The extensive features of ISOS represent more
than 400 staff years of software engineering efforts that have been field-proven
in more than 3 million DSL and broadband wireless installations. More information
at
http://www.virata.com/cgi-bin/frame.pl?URL=/products/isosdesc.htm
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Legerity high voltage chip combines
voice and DSL
If delivered as planned, DLCs can
triple capacity
The AMD spinoff has working parts, but won't deliver
volume until late next year. They have virtually eliminated the splitter
and delivered POTS and ADSL in little more space than today's DSL-only cards,
without excessive power demand. The resulting cards will provide less
expensive DSL to remote terminals, as well as for emerging systems and direct
switch interfaces. Crucial to the design is 170 volt technology at high
speed (900 meg transistors), which may also improve efficiency in separate
line driver parts. Infineon/Siemens and Lucent Micro are racing to produce
similar parts.
** Does your DSLAM have IP IQ intelligence? Take the Copper Mountain IP
IQ test and find out?
http://www.coppermountain.com/banner/ipiqc/dslprime.html
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G.shdsl on the way
From New Hampshire to your DSLAM in
under six months
``We are very pleased with the results of the University
of New Hampshire testing,'' commented Duncan Greatwood of Virata. ``We achieved
multi-vendor interoperability on several fronts including steady-state operation
and in the implementation of the G.handshake pre-activation protocol. ''
Adtran told us they expect to be delivering commercial product in Q1, and
volume in Q2. Everyone's optimistic about product early next year, although
no one will be surprised if that slips a little.
** Avail Networks offers a free white paper covering pros and cons of delivering
voice over DSL (VoDSL) services to MTU-based businesses based on alternative
deployment approaches. Avail's Frontera(TM) access solutions - optimized
for voice in the MTU - enable forward-looking providers to offer converged
voice and data with superior quality of service. Frontera solutions are
designed to reduce subscriber break even points and dramatically increase
revenues per subscriber. Access the white paper now http://www.availnetworks.com/library/whitepaper_reg.html
Contact: David Kamm, dkamm@availnetworks.com <ad>
Siemens delivering
600,000 lines to Germany, 6,000 to
Indonesia
After technical problems held back the products, Siemens's
marketing clout is now making them a player. They have a complete product
line, with equipment from US subsidiary Unisphere and Israeli branch Seabridge,
and now that the problems are solved, are delivering massive quantities
of gear to Deutsche Telekom. Texas Instruments is very happy that key customers
Ericsson and Siemens now seem to have put their problems behind, and is
bidding aggressively for sales around the world.
** Palm Springs. La Quinta. Industry leaders. Don't miss Mike Malaga and
two dozen others at the 4th Annual DSL Summit December 4-7, 2000 at the
luxurious La Quinta Resort in Palm Springs. To join or for further information
connect: http://www.IT-TelecomSolutions.com
or call 312.894.6418 <ad>
Let's hear it from the chief
More CEOs comment
The UBS Warburg conference featured a glittering array
of industry leaders. The presentations are carefully checked and typically
dry, because a press or investor misunderstanding can literally cost millions
in instant market drop. The audience is generally very bright and well-informed,
but rarely as knowledgeable as the trade itself.
Mike Tzannes, Aware, claimed an extraordinary profit potential, with
a fixed cost of operations (essentially, a body of engineers) and revenues
that will grow with the rapid expansion of sales. Many investors view Aware
as virtually a proxy for Analog Devices, their largest licensee. When asked
whether he worried because Analog Devices represented such a large share
of revenues, he reminded the crowd how well ADI was doing, but also pointed
to other customers, including Legerity, with excellent prospects.
Faraj Aalei, Centillium, is enormously proud of the seventy million
transistor Entropia, which adds a major packet voice product to grow beyond
the DSL market.
"DSL needs chips for both the customer and the central office, nearly
twice as many ports as cable" said Armando Geday of Globespan,
whose market cap is lower than cable chip provider Broadcom - a situation
he presumably hopes the street will correct. "We have made significant
progress in achieving our goal to be the undisputed market leader in DSL."
The market knows Globespan as the largest pure play DSL vendor, with key
customers Cisco and Lucent leading industry growth.
"We don't worry about over-capacity with Internet demand doubling every
four months. We intend to ride that growth by lowering prices dramatically
- 40-50% per year. Increased demand as prices come down will more than make
up for the lost revenue" was the good news for DSL providers
who need to buy that capacity from Jim Crowe of Level 3.
"We're the leading frame relay DSLAM provider to Verizon/GTE"
was Orckit CFO's Aviv Boim's pride, expecting to deliver even more
lines to Verizon in the coming year. Their basement DSLAM, the IntenCity,
will be shipping with a fast VDSL line card very soon.
A look at the hard times
More layoffs will come - folks at Covad are scared,
NorthPoint will cut back when merged with Verizon, Verizon itself is cutting
25% (quietly). Many at Ameritech left after the SBC takeover, and Qwest
is dropping 12,000 or so at US West. Not to mention the recent layoffs at
BellSouth, NTT, BT, and KPN.
For CLECs and other companies without positive cashflow, the new dynamic
is simple:
- 1- Companies losing money are dependent on raising
more funds
- 2- Wall Street has lost so much on DSL (and dot.coms)
they almost always refuse those funds today
Therefore
- 3- Most companies have no choice but to cut back and
conserve capital till profits are in sight
Incoming:
- "This is sounding like a s___ business.
Man, you need to put on a happy face for all of us. Remember that Monty
Python movie where the guys are up on the crucifix and start singing,
"Always look on the bring side of life..." was one pained
response to our last issue. But almost 4 million lines are going in
this year, and it could pass 10 million next year - the stock market
is crazy, but the real business is good.
Products
- Harris has a $585 line tester that can detect data
as well as dialtone. TS45S xDSLSafe Test Set. Darian Hong read
our "Line stealing" story last week, and wrote "It is
the only test set in the industry that can pull dial tone on a POTS/ADSL
line without interrupting the ADSL connection. It also actually
alerts the technicians of data on the line with an audible tone. The
TS45S not only alerts the technician, but also has a high impedance
monitor circuit to prevent the technician from interrupting the data
line even when connected." Please get that unit to the field, especially
in apartment buildings. It was no fun when a tech cut our DSL line,
presumably because he thought no dialtone meant
People:
- Leroy Moyer, once a partner at Deloitte, took over
as CFO at Interspeed, where presumably his primary job will be to make
sure stockholder suits don't spill over to parent company Brooktrout.
Competition: here's how to help
An editorial for policy wonks only
- all others please ignore
"This Commission, however, prefers to provide
the benefit to consumers rather than the telco" is the Illinois
Commerce Commission's appropriate standard for public policy. So our first
recommendations directly benefit consumers, and only incidentally the companies:
truth in advertising and improved service quality, especially time to install
and repair. These policies favor companies who in fact provide better service,
a challenge the CLECs are happy to accept. We place these consumer benefits
first, although Jeff Blumenfeld of Rhythms and Jason Oxman of Covad told
us their priority is enforcement.
If regulators are committed to maintaining competition - a policy we think
republicans and democrats share - they must use their authority strongly,
and do so promptly, before the competitors are all gone. Not all CLEC problems
are caused by ILEC actions, (sometimes they protest too much) but these
should be addressed.
Truth in advertising should be step
one
Telcos have 75% of the DSL market, and will always
have greater volumes and presumably economies of scale. So competitors must
offer a superior service, and be able to make that clear. DSL and cable
service are designed as always-on internet connections. The speed that counts
is what's regularly delivered to the internet. We believe competition should
be about better service, not who can more effectively mislead in their advertising.
The result parallels Gresham's law - bad money
drives out good. In our territory, a 512K CLEC line is consistently
faster than a 640K ILEC service - but how is a consumer to know? 640K sounds
better, but in fact is not consistently delivered to the internet. There
ought to be a law - and there is: basic truth in advertising. It will help
incumbents too - after all, cable companies can advertise "10 meg"
and soon "30 meg" if nothing is done.
Demanding quality service - rapidly
delivered - is step two
We believe twenty-five years ago US telephone service
was extraordinary, and that those standards can be profitably met today.
Reality today is that service is far behind the quality telco CEOs Ed Whitacre,
Ivan Seidenberg, Duane Ackerman, or Joe Nacchio believe they should be delivering,
and which will ensure their long-term success. The same policies that improve
consumer service would dramatically reduce competitors costs, because telco
errors and unnecessary delays are a large burden on competitors. Each improperly
installed or tested line costs a truck roll that decimates profit; every
extra day of delay provisioning service makes the customer less likely to
buy DSL - and more likely to move to cable.
Time to install
must be competitive
"Loop provisioning timeliness is the single most
important regulatory issue. Adopting a national requirement for time to
install is the key step we hope regulators will take." Jason Oxman
of Covad told us today. In Texas the PUC arbitration ruled "3 business
days is a reasonable approach based on the evidence in the record."
The real world agrees "If we didn't take care of customers in a few
days, we'll lose them," we were told by a cable installer. This is
not a tough requirement, as Illinois made clear "Ameritech has failed
to demonstrate any reason it requires five business days to provision a
line shared loop that requires 10 minutes of work." But while Texas
has required three day provisioning (unless there's a loop problem), and
Illinois wants to get it to one day, it would cost millions and unacceptable
time to resolve this state-by-state. Federal action - even clear guidance
to the states - could speed things up dramatically.
Test and clean
the lines
Lines that don't work cost a fortune for all parties
involved, and British Telecom's experience shows advanced testing can prevent
most problems. In an automated test of one million lines, 20% were identified
in advance as requiring work - and 5%, initially believed unservable, proved
fine, according to data from Teradyne, whose equipment was used, and verified
by BT.
Systematic testing in the US would pay for
itself, most likely, in direct savings to the telcos. It would also dramatically
reduce problems for the CLECs. Perhaps the largest payoff comes to the consumer.
Right now, most customers between 12,000 & 18,000 feet from the CO are
simply denied service, by both the ILEC and CLEC, to avoid possible problems.
This represents at least 20%, and probably more, of the Americans who cannot
obtain DSL - although most could be economically served. The number of potential
customers added, without capital investment, is probably greater than if
Project Pronto-like remote terminals were deployed throughout the nation.
Enforcing the rules, step three
Oxman was clear:
"After they issue rules, they need to follow
up with enforcement." But Blumenfeld believes the commission only takes
action after complaints, and that's insufficient. They both want the commission
to be pro-active, asking the telcos to provide metrics to demonstrate
compliance. The CLECs have neither the staff nor the desire to inundate
the FCC with complaints. Going forward, the problem becomes worse. Verizon
will control NorthPoint, Covad's largest customer will be SBC, and Rhythms
may be taken over as well. Bringing a complaint to the commission invites
retaliation elsewhere. Oxman says the law is clear "The FCC needs to
inquire under section 218 so that the LECs demonstrate they are actually
fulfilling the rules."
Computer-mediated ordering comes first. "OSS bonding is
a key issue that should be fixed immediately. Complete order flow-through
without needing human intervention has been promised, and needs to be delivered."
Oxman says. Blumenfeld argues that failure to provide electronic access
means the telcos are already six months late complying with the June 6 line-sharing
rules. The Illinois decision appears to agree. "Ameritech is
obligated to give CLECs non-discriminatory access to all OSS necessary to
provision line shared loops for xDSL service. Such OSS must be sufficient
to allow CLECs to determine what type of DSL is suitable for a loop (pre-ordering),
place orders for the CLEC’s chosen type of xDSL service into the Ameritech’
s systems to be processed and have the line-shared loop provisioned."
Find common ground for advanced services
An articulate telco executive wrote us last week that
the FCC rules would prevent his company from deploying the most efficient
remote terminal equipment, while Oxman sees other regulations interfering
with their equipment choice as well.
"Prohibiting multi-functional CO equipment
in a colo would discourage both providers and equipment manufacturers from
precisely the kind of innovation we're all looking for." Both are right,
we believe, and urge the rulemakers to find common ground on such issues
in the name of efficiency.
Detect and publicize all subsidies
"The separate affiliates are a good idea, but
no panacea unless they are truly separate. So far we haven't seen that."
Oxman's claim rings true, and the advantages given the "independent
subs", from electronic OSS access to near exclusive presence on the
web sites, appear substantial. The original FCC proposal for separation
had tough terms (no corporate credit guarantee among them), but the current
form doesn't come close.
Long distance approval is the primary
lever
"The FCC has to maintain the bar in the 271 long
distance issues, which is where the key action is. They can't give Verizon
a free pass in Mass, as they did in New York." We don't agree with
his free pass view of the New York 271, which forced the subsidiary and
has numerous performance clauses. But the long distance approval will be
the crucial lever.
The primary rule: remember the customers
ISPs will be dead without open access
to telcos and DLECs
Discriminatory pricing policies could
put most out of business
We're speaking plainly, because too many public comments
evade the issue, and it will soon be too late. We're not looking to bash
telcos - in fact, Covad, even before the financial problems, was implementing
policies to discard all but a handful of ISPs. As a practical matter, most
ILECs do not offer anything like open access, despite their claims. Bell
Atlantic pricing is typical; their own sub collects nearly twice as high
a margin as all but 2-5 large ISPs (typically, $13 versus $7, calculating
back from the $39.95 market rate.) Then additional fees (for individual
DSLAMs and COs, T-3 purchase rather than dark fiber colo'd) make the disparity
even worse. The FCC was negligent allowing these tariffs - they make a mockery
of open access claims. They hurt Verizon as well - GTE, which did not exclude
ISPs, had nearly twice the DSL subscribers as BA. We call it the "AOL
tariff", because it was initially written to provide AOL favored pricing,
while effectively avoiding most competition. Today, it gives Verizon's "independent"
subsidiary an almost insurmountable advantage over others. The low acceptance
rate for Bell Atlantic's ISP program proves the point.
The additional cost of billing the typical ISP
compared to a large one is negligible - cutting their margin in half puts
them out of the broadband game, which most projections - including Bell
Atlantic's - believe will dominate.
** Learn about the g.shdsl market and how to build shdsl equipment. Virata,
the leader in software and silicon for DSL customer equipment, is set to
become the leader in g.shdsl solutions. Register at http://www.virata.com
for Virata's free g.shdsl technical seminar in San Jose on December 14th
to learn about the technology, opportunities, and see breakthrough g.shdsl
implementations in action. (ad)
In-progress: Intel's network chips for gateways, Sharegate, UK (colo next
door), updated numbers from Bell Canada and the US telcos, Carol Wilson's
"The Net Economy", Knowling's successes at Covad, Voice and chip
analysis
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